Friday, September 19, 2008

Open letter to my congressional representatives

I have been listening to lots of coverage of the Tresury Secretary's financial bail-out program proposed 09-18-2008. From my understanding, our government would be responsible for over 1 trillion dollars of bad mortgages. This increases our deficit by 25%. Right now, with just AIG, Bear Stearns and Fannie and Freddie loans under our control, treasury bill yields are nearly 0%. If we take this extra $500 billion in bad debt, the yields will be negative - people will be paying the government to borrow money from us. Our dollar will tank and inflation will go through the roof.

I know that not taking action will cause many more financial institutions to fail. I know that stock markets will continue to fall. This is a risk that the investors knew they were taking on. These financial institutions knew that they didn't really understand the securities they were creating. They willingly took on the risk and gambled with our future. We cannot have the federal government take away all that risk and tell these companies that they were right to take on this risk. It will tell these institutions that they are too important to fail, so if they make further mistakes or take on more bad risks, they will be protected from this risk by the tax payers. This can not happen, and I ask, as a strong supporter of you and an Obama volunteer, that you vote against any such bail out that leaves banks and executives involved in this without penalties.

Thank you for your time


JessiTRON said...

There are penalties to the management and shareholders of these bailed-out institutions. The management is fired, and the shareholders lose all or most of the money they invested in the stock. Are these penalties commensurate to the risks they took on? No.

We buy up this debt -- only if all of it defaults are we out the entire amount of money we spent on it. If all of it defaults, we're all screwed, the economy is collapsing anyway.

This kind of action is what didn't happen in 1929-1930. Congress, the Treasury, and the Fed don't want to do these bailouts. They have to, for the very survival of the economy. And hey, if treasury rates are low, then at least we're taking on debt cheaply!

The way to counteract the moral hazard of the bailout is with careful regulation that prevents financial firms from taking on these kinds of risks without adequate reserves and transparency in the future. We won't get that kind of regulation from a McCain administration -- his favorite economic advisor, Phil Gramm, is as responsible as any one person for the lack of regulation on the securities that triggered this mess.

JessiTRON said...


John J. said...

Thanks jessi for the clarification on the bonds. These things are complicated (glad I am not an economist). Basically, when more people want a bond (treasury bill in this case) the benefits needed to entice a new purchase can go down (in this case, the interest rates), but the value of those bonds go up. The inverse happens when fewer people want the bond (the value goes down, but the rates go up).

What is confusing me now is that the government, in order to finance this bail out insanity, is going to need to issue hundreds of billions in new bonds, and with so much bad debt on our books, the security of those bonds is lessening (still best rating possible as far as I know though) so even fewer people would want to buy into it.

So I take out my t-bill statement, since I am not sure what is good or bad there, but the inflation and drop in the value of the dollar is already panning out just so far today with oil over $104 (was in mid $90s for the past couple weeks) and the dollar is falling against the Euro.

Comrade Kevin said...

You know, sometimes I just want to pull the whole system and start over from scratch, rather than trying to piece it back together as they're doing right now.

no_slappz said...

john j,

The chief culprit in today's finanacial problems is the Community Reinvestment Act, which forced banks to lend money to people likely to default.

The problem was NOT the banks.

The problem was the Borrowers.

People speculated on real estate because credit limits and common-sense lending principles were suspended.

If you want to blame the banks for the mortgage issue, then you have to blame casinos when someone gambles away his life savings playing 21.

John J. said...

Nothing forced the mortgage brokers to push clients to ARMs the brokers knew the borrowers wouldn't be able to afford 3 years down the line. Greed and knowing that they wouldn't be on the hook when the balloon rate came due did that. Here the broker is at fault.

Nothing forced banks to buy these mortgages they knew were risky. Some banks were lied to by the broker, but most knew that there was this lovely new type of security that was authorized when the Glass-Steagall Act was approved that would allow them to "remove the risk" from these risky mortgages. Again greed and knowing they would be off the hook should the risk actually still be around drove them.

Nobody forced companies like AIG to issue credit default swaps on these misleading investment structures. This completely new structure that even those creating it didn't understand. Once again, greed drove investors and actuaries to think they could take the risk out of inherently risky investments.

Then, when markets over-inflated - in part due to speculators, although they were the minority of home buyers in most areas - and when those ARMs did reset after Bernanke started raising interest rates to a reasonable level (yes, I am one of those who thinks Greenspan let himself get pushed into keeping interest rates too low for too long, although I'm not willing to put blame only on him) and people's wages didn't reset at the same rate, the bubble (or froth if you prefer) popped. When that bubble popped, the illusion that risk had disappeared popped too.

What we are facing now is what you get when you remove sensible regulations saying that you are responsible for what you do. The reason it was able to get as bad as it did is because those responsible, the ones with the knowledge to be responisble, were able to push the risk right up this giant ponzi scheme.

As far as your analogy, you probably should have picked a better one. In many states (I know here in Missouri, not sure about all others) casinos are required to sponsor quit gambling clinics and ads. They are also often required to put limits on how much a single person can lose in a day. Casinos are, in part, responsible for the act of taking away a person's money. This same theory is why bar tenders can be sued if they serve someone too much alcohol and the client gets in an accident while driving under the influence.

In all three of these cases, both sides need to be held responsible for the actions they took. Borrowers who knew what they were doing should be held responsible, but we shouldn't punish borrowers who were mislead by brokers who had nothing to lose. I can speak from personal experience that all 5 brokers and my real estate agent all pushed, in some cases duplicitously, for my wife and I to spend an extra $30k on a house. In fact, we were told "You could easily afford $50,000 more if you want." A couple of the less above board lenders would offer a fixed rate, but hint that we wouldn't qualify for that and that we should go for an ARM. We were "fortunate" to be getting into the market at the beginning of the downturn and so had the benefit of partial hind-sight. Most people not even six months before that did not have that benefit and would be much easier to convince in.

I am not one to blame the mark for being conned by a professional con man.

Distributorcap said...

many people say (and i am no expert) that what congress and hoover did aftger the crash caused the depression...
i know doing nothing is not the right answer and doing something isnt either

but keeping bush around is so wrong

Craig Mayhem said...

There's blame enough to be shared. Banks didn't have to approve loans for people who SHOULDN'T have qualified. They're professional money lenders - they should have known better, but greed is a hell of drug.

People should have known better than to over-borrow, but as someone who grew up poor, it's more complicated than that. If someone is willing to "give" you money, you tend to want to take it - and figure out the payment later. Yes, they should have known better and they should have consequences too - but I find it hard to place a lot of blame on Joe Consumer when banks AND the government held out the carrot of home ownership.

I seem to remember Bush touting home-sales and ownership as a mark of a strong economy, now he says it's why we're in crisis.

Personally, I have little sympathy. I've paid my share of 'stupid tax' over the years and learned from my mistakes.

More American companies need to learn to pay stupid-tax.

Greedy businesses and traders need to take a hit. Why do we bail out rich people?

Why do we let Wall Street trade everything imaginable? Futures, speculation, hedge funds - where does it end? When is enough money enough?

I'm pissed. Bailout? Maybe, but regulate the hell out 'em.

No more tax breaks, no more bailouts!

Yes I'm bitter.

no_slappz said...

john j,

In your response, you mixed many apples and many oranges. YOu wrote:

"Nothing forced the mortgage brokers to push clients to ARMs..."

First, you are obviously out of your depth when it comes to financial issues.

Second, ARMs are an excellent form of mortgage. They have a good history and were a boon to borrowers when they were originated in 1984. Mortgage rates were north of 12% in those days. No one knew if those rates would drop anytime soon.

They did drop. It was the ARMs that allowed those intrepid home-buyers to enjoy the decline of interest rates and the increase in housing prices that followed the punishing interest rates that came with Jimmy Carter.

Third, I believe you meant to focus on Subprime Loans, not ARMs. People with low credit scores, weak job histories and no downpayment money chose Subprime No-Doc and Low-Doc loans.

Why? Because they did NOT qualify for traditional loans.

You claimed:

"...the brokers knew the borrowers wouldn't be able to afford 3 years down the line."

Really? How would they have known? The subprime loans at the heart of our current crisis were No-Documentation and Low-Documentation Loans. Those loans enable borrowers to borrow money without revealing their finances.

You obviously have limited knowledge of the commercial financial industry in the US. It works like this -- there's always an organization willing to lend money to people with bad credit and no money and poor repayment prospects.

Consider pawn shops. Like banks or other mortgage lenders, they give money to a borrower based on the value of the asset collateralizing the loan. If you give your watch to a pawn broker, he'll give you about 10% of its value. If you don't return to reclaim it, he'll sell it.

Houses are treated in a similar way. I fyou stop paying your mortgage the lender will eventually seize the house and sell it to satisfy your debt.

Theoretically, the house should at least hold its value, allowing the lender to sell it for the amount of debt outstanding. Lately, things have failed to follow the historical pattern.

You wrote:
"Greed and knowing that they wouldn't be on the hook when the balloon rate came due did that. Here the broker is at fault."

All tax-paying businesses are "greedy". If not, they become bankrupt.

The secondary mortgage market exists for the same reason that the stock and bond exchanges exist -- to give liquidity to issuers of securities. The opposite of "liquidity" is a credit crisis. If businesses and people are unable to borrow money on acceptable terms, the economy slows down and more people lose their jobs.

Apparently that's what you want.

Your comments suggest that you believe the stock and bond markets are something apart from the economy and only exist to give a small group of people the chance to play some high-stakes game of chance.

However, maybe the worsening of things in the last few weeks has opened your eyes. Probably not. But I can hope.

Anyway, you blathered on about Glass-Steagall, which had been reduced to meaninglessness years before the law was repealed.

You blathered about Credit Default Swaps, which are perfectly good financial tools. Some changes may be necessary regarding financial rules, but Swaps have nothing to do with the laziness that led to worthless examinations of the pools of mortgages that were found to have too many bad mortgages in them.

The Prime Cause -- The Initial Problem -- was the 1977 Community Reinvestment Act, a law that force banks to give mortgages to people with bad credit and no money. The initial beneficiaries were -- as stated in CRA documents -- blacks and hispanics.

After that, the insanely generous law was exploited for all it was worth. But any way you slice it, the problems started with the CRA.

If you favor tightening lending rules, then blacks and hispanics will once again find themselves unable to get a mortgage.