Federal govenment will create entity to hold banks' debt

[al_bundy]

One thing we can count on when all of this is over with, is that we'll all face a lower standard of living. America's largest corporations have exploited capitalism big time. The surprising thing is that the general public doesn't even seem to be angry about it. I guess they figure this is business as usual.

happens every decade, wall street almost goes out of business because they make close to a TRILLION $$$ in bad loans (in 2008 dollars), the government fixes it and people forget in a few years

 

[al_bundy]

At least with the Resolution Trust Corporation we (the taxpayers) had the satisfaction of seeing the offending institutions go out of business -- although we were still stuck with the bill. Apparently this plan will permit the offenders to escape any consequences and continue "business as usual" -- while shifting all of the risk and ultimate loss to the taxpaper. This really sucks! Heads should roll!

it's called a moral hazzard

with wall street the government can force regulation down their throats as part of the new legislation. the government tried to regulate this going back to 2004 and it was DOA every single time.

if the government pays off people's mortgages, it's bad for wall street because they lose out on interest income, investors lose out on interest, rates will probably go up, inflation and whose mortgage gets paid off? everyone's who bought in a time frame or only people that can't pay it. i might have to stop paying my mortgage just to get a bailout then

 

[socca]

Or we could transfer custody to the govt, let them arrange a liquid market for both the buyer & seller, and get people back in business. Companies stay in business, people keep their jobs, families can take care of their homes & neighborhoods, and everybody keeps paying taxes. We could call it... I dunno... [-]voodoo economics[/-] the "trickle down" effect!

The interesting question is to what extent there really will be a trickle-down effect. Is the guy in Hometown, USA who naively/stupidly took on a mortgage obligation he can't fulfill suddenly going to get debt relief? Is the American taxpayer going to send him a nice fat check to cover his obligations? Does a vast new welfare program for Wall Street automatically translate into a vast new welfare program for Main Street?

Personally, I believe that people should be held accountable for their actions, including experiencing discomfort and pain when they make a poor decision. I do not think that the taxpayer has any obligation or responsibility to rush in and save anyone from their own stupid decisions. Normally, the corporate executive class agrees with me completely, except when they are the ones doing the suffering. Fortunately, these folks have powerful friends in Washington who are more than willing to alleviate their pain.

 

[al_bundy]

only thing is that when things get this bad nobody makes loans to anyone, period. companies like best buy rely on short term financing to buy things like holiday season inventory. when the credit markets freeze it can be very bad for everyone if the government doesn't step in.

before the Fed banks like JP Morgan would do this, now it's up to the Fed to be the lender of last resort. There is hundreds of years of historical precedent for this in England and other European countries.

 

[Dawg52]

Well looks like it pays to be a calm investor like myself. I've been saying all along that we should all just sit tight as better days are ahead. Time to go play golf.

 

[Retire Soon]

Money Market Insurance

The thing that upsets me the most about this new plan is insurance for money market funds. DW and I keep our cash in Vanguard Prime Money Market Fund where we're charged a small 0.24% annual fee.

Vanguard money market fees are among the lowest in the mutual fund industry. Since, they charge such low fees and their funds are owned by shareholders, they do not invest in risky paper and offer high returns on cash parked with them.

Some money market funds charge 3 or 4 times that for an annual fee. The mutual fund managers are greedy and many invest in riskier type paper in order to obtain higher yields (to cover the higher annual fee) and to thus make more money for fund management.

Now, the way I understand it, this MM insurance will not be optional? But, with two money market funds recently not being able to pay dollar for dollar + dividends back to investors (one MM Fund was only 97 cents on the dollar), who will want to invest in an uninsured MM fund?

If Vanguard now feels they have to buy insurance, the annual fee is going to go up, which means a lower return for investors. This is just another example of how consumers will end up with less money because of the greed and ineptitude of some of America's largest financial corporations.

 

[Geoffrey]

I took a torts class in college. The professor summed up torts the first day: imagine that a tree falls on someone . . . torts is all about deciding whether the law is going to shift that tree from the person it fell on to someone else.

Here, big losses were incurred by reckless investors. Someone is going to pay for the mistake. Looks like the Government has decided to shift the loss from the shoulders of Wall Street to the shoulders of the innocent taxpayer. Was it the right things to do considering the "dire circumstances" . . . perhaps there was no other way to avert a disaster. But, make no mistake . . . we will all pay for this. Priorities will have to be massively shifted to accommodate the new Government debt. Taxes will have to raised. Needed Government programs will be curtailed. To believe that we have all somehow magically dodged the bullet is naive in the extreme --the Government just hocked our future. We have been ill-served by our leaders. I hope a sufficient number of us remember that in November.

 

[Martha]

Amazingly, now the gummint will guarantee money market funds.

I heard that this was coming. What are your thoughts on it? I haven't had a chance to read up.

 

[Retire Soon]

I took a torts class in college. The professor summed up torts the first day: imagine that a tree falls on someone . . . torts is all about deciding whether the law is going to shift that tree from the person it fell on to someone else.

Here, big losses were incurred by reckless investors. Someone is going to pay for the mistake. Looks like the Government has decided to shift the loss from the shoulders of Wall Street to the shoulders of the innocent taxpayer. Was it the right things to do considering the "dire circumstances" . . . perhaps there was no other way to avert a disaster. But, make no mistake . . . we will all pay for this. Priorities will have to be massively shifted to accommodate the new Government debt. Taxes will have to raised. Needed Government programs will be curtailed. To believe that we have all somehow magically dodged the bullet is naive in the extreme --the Government just hocked our future. We have been ill-served by our leaders. I hope a sufficient number of us remember that in November.

I couldn't agree with you more. You've made a very accurate and eloquent statement of the issue. I'll bet we'll never hear any talk about tax increases from either major political party until after the election.

 

[audreyh1]

The next administration is not going to be able to do anything but clean up the mess made by the current administration. That's not fair either. I'm not sure who I want to win for that very reason!

Audrey

 

[Geoffrey]

I have one more thing to say . . . then I'll cool my jets for awhile. When all the back-slapping and toasting is over the average little guy still isn't going to be able to afford those mortgage payments; thus, there will still be a tidal wave of foreclosures. And, the average tapped out consumer still can't afford existing houses. Thus, the driving force behind the financial collapse still remains. So, I don't see how we've "solved" the problem. Perhaps we've solved "the problem" for the imprudent investor, but we haven't solved the housing crisis.

 

[FinanceDude]

Finally, the adminisration grew a pair of gazungas and did what needed to be done.

Does anyone else see the delicious irony in all these nationalizations and handouts/bailouts happening under an allegedly conservative Republican administration? Hugo Chavez could only dream about doing his thing on the scale the US feddle gummint has done in the last few weeks.

Plus, it's perfect. Nancy Pelosi and her cronies will take credit for it, and blame Bush for making the mess happen, it's the perfect political crime...........

 

[al_bundy]

The next administration is not going to be able to do anything but clean up the mess made by the current administration. That's not fair either. I'm not sure who I want to win for that very reason!

Audrey

this administration is cleaning up the results of what was passed during the clinton administration. repeal of glass-steagal, the hyping of subprime that started in 1997. Except for Greenspan, guess where Clinton's economic team went after 2000?

last few years fannie gave most of their bribe money to democrats to keep the regulators at bay. FDIC and Greenspan wanted to regulate these crazy loans back in 2004.

 

[FinanceDude]

The next administration is not going to be able to do anything but clean up the mess made by the current administration. That's not fair either. I'm not sure who I want to win for that very reason!

Audrey

So, it is ALL Bush's fault?

 

[Retire Soon]

I have one more thing to say . . . then I'll cool my jets for awhile. When all the back-slapping and toasting is over the average little guy still isn't going to be able to afford those mortgage payments; thus, there will still be a tidal wave of foreclosures. And, the average tapped out consumer still can't afford existing houses. Thus, the driving force behind the financial collapse still remains. So, I don't see how we've "solved" the problem. Perhaps we've solved "the problem" for the imprudent investor, but we haven't solved the housing crisis.

In my book, you've hit another home run. I read an article in yesterday's San Diego Union that average home prices in San Diego County are down to an average of $350,000, a number unseen since March 2003. Further, DataQuick predicts average prices to fall another $100,000 in the next couple of years. Part of the reason is that nearly 43% of recent sales are foreclosures.

Now, what will happen when unemployment goes up? Many homeowners in that county live from paycheck to paycheck. Things really are going to get worse in the housing industry.

 

[cute fuzzy bunny]

I heard that this was coming. What are your thoughts on it? I haven't had a chance to read up.

My thoughts are a) not too many money market fund operators have had to bridge a 'breaking the buck' gap, in fact I'll bet more money has been paid out in FDIC deposit insurance than money market spackling and b) I hope that covering MM's doesnt cause the MM operators to start taking more risks to shoot for higher yields...and more customers.

 

[al_bundy]

housing prices stunk from 1987 to 1997, yet most people think the 1990's was the best decade ever

 

[brewer12345]

I heard that this was coming. What are your thoughts on it? I haven't had a chance to read up.

Its a way to get the money markets (short term funding market) working again, rather than to protect bad actors.

 

[socca]

I've been trying to come up with a catchy name for the new version of the Resolution Trust Corporation, but haven't had any luck. Here are some ideas:

FCB Corp: Fat-Cat Bailout Corporation
FTT Corp: F*** The Taxpayers Corporation
TLD Corp: Taxpayers Love Debt Corporation
PTI Corp: Punish The Innocent Corporation
RTG Corp: Reward The Guilty Corporation
MFA Corp: Mortgage Financing Alchemy Corporation

If anyone can think of something better, just pass it along.

 

[ChrisC]

The solution to this financial mess will be grounded in a comprehensive resque plan for homeowners and housing finance, which will make it politically expedient for swift enactment by Congress. That's the only certain thing we can count on these days. We'll probably get something named like the Home Owners' Financial Assistance Corporation. Here's an exceptionally good viewpoint on what caused the problem in today's American Banker:

Viewpoint: Finding a Way Out of the Lending Crisis

By: Emma Coleman Jordan*
American Banker, 9/19/2008 -- Wall Street financial wizards have conducted their businesses as though the complex financial products that generated billion-dollar compensation packages also created a protective moat beyond public accountability.

In the interdependent world of global finance that is now collapsing, home mortgages were abstractions. During this decade the basic human connection between lender and borrower in consumer finance was cut and thrown away as a quaint vestige of a bygone era.

In 1981, at the beginning of the era of retail banking deregulation, I wrote the first state consumer protection law for California to stop the practice of "playing the float" — holding customer deposits to earn money by delaying credits to the customer's account. This abuse crept into retail banking because the full market effects of lifting the previous interest rate ceilings were poorly understood. Follow-up regulation was necessary to close a window of market failure.

Just as in the current crisis with subprime loans, competition could not and did not do the job after deregulation.

Getting out of this mess will require four things: public recognition of the scope and scale of the backlog of mortgage-related defaults, a return to basic human connections in mortgage lending, aggressive consumer protection, and insistence on generous capital cushions (rainy day funds to buffer unexpected losses).

Bring all the bad loans out of the dark recesses of investment and commercial bank balance sheets and into the light of public review. We cannot fix it until we see it.

Next, back to basics. Remember that houses are homes, not abstract transactions that can be made profitable with unreasonable levels of leverage/borrowing.There is still a role for more conservative securitization, in which packages of home mortgages are sold to the restructured Fannie Mae and Freddie Mac, and a well-regulated private market. However, preserving the connection between originator and borrower is more likely to reduce fraud and consumer abuse.

This will require political and economic leadership to encourage Americans to return to the tough, unpleasant discipline of saving. At the heart of the current meltdown is a stark reality: America is the world's biggest debtor in both the public sector (budget deficits) and the private sector (financial institutions and corporations). The U.S. financial system is now at the mercy of foreign sovereigns and institutions sitting on enormous piles of cash, much of it from the sale of oil and other products to us.

Shifting the bad loans, and the financial instruments based on these loans, on to the balance sheets of commercial banks will not solve the problems we face.

In the new pea and shell game, Bank of America has become the new private shell of choice. B of A, the nation's largest bank, holds 10% of all deposits. It first absorbed Countrywide Financial, the biggest and most problematic subprime mortgage lender, with a loan from the Fed; this week it absorbed Merrill Lynch, with benefit of a waiver of a Fed rule designed to prevent the bank holding companies with FDIC-insured banks from lending to investment bank subsidiaries.

Bank of America, its depositors, and the FDIC are not the long-term solution to the accumulated pile of loans in default.

In August the inventory of unsold foreclosed houses reached 750,000. With the takeover of Fannie and Freddie, the federal government will be the owner of some of these properties.

The relationship between the house as collateral for a loan and the many layers of complex new financial products grew ever more strained in the rapidly changing environment. Regulatory ground rules became a passive backdrop as three factors converged to turn routine home loans into an international financial crisis: unregulated brokers, complex financial instruments, international financial integration. I know that it is not fashionable to talk about human values in the same sentence as global money, but maybe that is the real problem.

Modern financial titans, like Sherman McCoy, the central character of "The Bonfire of the Vanities," have unwound with a single wrong turn, carrying them from the heights of money, power, and privilege on Wall Street to the anger and rage of the ordinary folks in the South Bronx.

The wrong turn took place more than 10 years ago, when the first experiments with bad loans were pushed on poor and unsophisticated borrowers who lived in communities that had previously been starved, through redlining, from receiving any loans at all. Target practice in poor communities proved the viability of the abusive terms: no exit fees, pay-what-you-want ARMs, liars loans, low teaser rates, and balloon payments. These same terms were then quickly adapted to middle- and upper-middle-class borrowers in search of a vacation home or home equity for college tuition.

Within five years Wall Street hedge funds perfected the lending techniques first used in poor communities. In the new structure for housing finance, unregulated, independent brokers sold loans by misrepresentations. Houses that people depend on for shelter became chips in a high-stakes game of liar's poker.

The late Gov. Edward Gramlich of the Federal Reserve warned that the introduction of "huge new sources of capital and financing of largely unsupervised subprime mortgage lenders" had caused problems with subprime loans.

He argued for re-establishing the connection between the lender and the borrower through banning the most objectionable provisions and through a mandatory "suitability rule" which would require lenders to make loans that are matched to borrowers' economic profile and "in the borrower's best interest." The link between the borrower and the ultimate holder of the loan could be further strengthened by expanding existing rules to impose on the holder liability for fraud or other problems with the process.

The current crisis has been driven by the lack of adequate levels of cash to absorb the losses from defaults. Sovereign wealth funds have filled this cash gap, becoming the lender of last resort for cash-strapped commercial and investment banking companies like Citigroup and Merrill Lynch only nine months ago. The sovereign funds of Abu Dhabi, Singapore, and China were among a collection of funds that came to the rescue of these companies. China's four biggest listed banks decided to scale back drastically their purchase of Fannie and Freddie securities, triggering the government takeover just five days later.

Describing the mortgage meltdown is easy, but proposing a solution is less so.

For all the talk of "moral hazard" and "market discipline," these after-the-fact buzzwords are a Rorschach test of whether you believe the government should play an active, aggressive role in controlling the risk-taking and profit-seeking party, just as the guests have started to arrive and loosen their ties.

*Prof. Jordan teaches banking, economic justice, and commercial law at Georgetown University Law Center. She is the co-author of "Beyond Rational Choice: Alternative Perspectives on Economics" and "When Markets Fail: Race and Economics."

 

[ziggy29]

I was worried this thread was headed to the Soap Box for a moment...

 

[laurence]

In my book, you've hit another home run. I read an article in yesterday's San Diego Union that average home prices in San Diego County are down to an average of $350,000, a number unseen since March 2003. Further, DataQuick predicts average prices to fall another $100,000 in the next couple of years. Part of the reason is that nearly 43% of recent sales are foreclosures.

Now, what will happen when unemployment goes up? Many homeowners in that county live from paycheck to paycheck. Things really are going to get worse in the housing industry.

I agree with the both of you. My house in San Diego has fallen from a peak of $580k to $370k (approximately) and shows no sign of slowing. This mega-billion dollar bailout will not keep my next door neighbor in her house, as her mortgage resets in a year and there is no way she can afford the payment on her $500k mortgage plus the $80k HELOC. And lots of others in my neighborhood are in the same place. The house behind me is already empty and abandoned. None of these moves change a thing for the troubled homeowner.

I do think it's a good move on net, like Nords said, if several hundred thousand people lose their jobs due to a sustained panic and freeze, how are we better off? The tax revenue losses alone offset some of the costs.

 

[FIRE'd@51]

Amazingly, now the gummint will guarantee money market funds.

Yesterday there were $180 billion of money market fund redemptions, or about 9% of the $2 trillion total. So this action should prevent any kind of "run on MMF's", certainly a distinct possibility in the panic that is going on these days.

However, I suspect this will lead to a lower rate of return on MMF's for a couple of reasons.

The first is that an insurance fee will be paid by the MMF's to the Treasury for this insurance. I don't know how much this fee will be. Does anyone know?

Secondly, I heard someone say on CNBC that to qualify for this insurance, MMF's will have to hold a portion of the fund (maybe 25-35%) in Treasury securities, which will further lower the yield on the fund. Can anyone verify this?

 

[cute fuzzy bunny]

We'll be better off because that pool of unemployed people will be ready to take ramp-up jobs quickly when the economy picks up, and they may be willing to work for less than they used to.

Not good for them, but having been forced to look at unemployment charts a lot lately, it looks to me like periods of high unemployment are always followed by economic booms. Maybe theres a correlation there...

 

[Bestwifeever]

Yesterday there were $180 billion of money market fund redemptions, or about 9% of the $2 trillion total. So this action should prevent any kind of "run on MMF's", certainly a distinct possibility in the panic that is going on these days.

However, I suspect this will lead to a lower rate of return on MMF's for a couple of reasons.

The first is that an insurance fee will be paid by the MMF's to the Treasury for this insurance. I don't know how much this fee will be. Does anyone know?

Secondly, I heard someone say on CNBC that to qualify for this insurance, MMF's will have to hold a portion of the fund (maybe 25-35%) in Treasury securities, which will further lower the yield on the fund. Can anyone verify this?

I imagine at least some of the MM redemption yesterday was people who decided to get back into equities, rather than a panic situation.

I wonder if MMF insurance would be limited to $100,000 as in FDIC insurance.