Tag Archives: bailout

Barney Frank’s Bankrupt Ideas

By INVESTOR’S BUSINESS DAILY | Posted Monday, October 06, 2008 4:20 PM PT

Financial Rescue: Democrats created the mortgage crisis by forcing banks to give loans to people who couldn’t afford them. Now Obama and Biden want bankruptcy judges to bail out the same deadbeat homeowners. And once again, Barney Frank is helping.

Read More: Economy


It’s been said that history is a lie agreed upon. Democrats are trying to rewrite history by blaming the Bush administration for the current crisis and claiming that the rescue bill is necessary to save the economy from Republican mismanagement.


More blarney from Barney.

Last Thursday on Fox News, when Bill O’Reilly tried to suggest that both parties might share the blame, House Finance Committee Chairman Frank, in a not atypical meltdown, disowned any responsibility for his lack of oversight over the last two years and his complicity before that.

Frank also claimed: “The fact is, it was 1994 that we passed a bill to tell the Fed to stop the subprime lending. We tried to get them to do it.” In other words, those rascally Republicans did it all when they took control of Congress that November.

The legislation he spoke of was the Homeowners Equity Protection Act. It was supposed to empower the Federal Reserve to set the rules on mortgages. Problem was, the Clinton administration had its own ideas of what the rules should be.

The Community Reinvestment Act, first passed in 1977 under Jimmy Carter, was intended to increase minority homeownership. It grew out of charges that banks were “redlining” entire inner-city neighborhoods as bad credit risks. Banks now were forced to perform outreach to these areas.

In the ’70s and ’80s, banks could show that they were trying to do that by advertising in minority newspapers and having representatives sit on the boards of local groups. In other words, they were rated on the effort made and not on the results achieved. Creditworthiness still mattered.

In 1995, as Howard Husock pointed out eight years ago in City Journal, “the Clinton Treasury Department’s 1995 regulations made getting a satisfactory CRA rating much harder. The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance.”

Creditworthiness and due diligence no longer mattered. As a 1999 New York Times editorial observed: “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Bill Clinton administration to expand mortgage loans among low- and moderate-income people and felt pressure to maintain its phenomenal growth in profits.”

On Frank’s and Clinton’s watch, the Community Reinvestment Act was changed to force the issuance of bad loans. Banks would be rated on the number of loans, not on their soundness. Fannie Mae and Freddie Mac were then encouraged to buy them up. It was all about affordable housing, even if the housing was unaffordable.

“From the perspective of many people, including me, this is another thrift industry growing up around us,” Peter Wallison, a resident fellow at the American Enterprise Institute, said back in 1999. “If they fail, the government will have to step in and bail them out the way it stepped up and bailed out the thrift industry.”

That prediction came true, but it didn’t have to.

On Sept. 11, 2003, the Bush administration proposed to Congress a new agency under the Treasury Department to assume supervision of Fannie and Freddie. The new agency would have had the authority to set capital-reserve requirements, veto new lines of business and determine whether the two quasi-government lenders were adequately managing the risk of their ballooning portfolios.

When former Treasury Secretary John Snow pleaded for Frank to support Fannie and Freddie reform, Frank responded: “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Democrats believe in affordable housing even if it’s at the expense of the vast majority who watch their credit, work hard and pay their mortgages on time. But for the deadbeats, particularly Democratic constituencies, they have ways to make affordable the housing you couldn’t afford. So first, they forced them into housing they couldn’t afford, and now they give them a financial mulligan.

In the vice presidential debate, Sen. Joe Biden said that “what we should be doing now — and Barack Obama and I support it — we should be allowing bankruptcy courts to be able to re-adjust not just the interest rate you’re paying on your mortgage to be able to stay in your home, but be able to adjust the principal that you owe, the principal you owe.”

To get this bill passed, Obama made a lot of phone calls — particularly to members of the Congressional Black Caucus, including caucus chief Rep. James Clyburn — assuring this would happen.

Those paying their mortgages on time don’t get that break.

Rep. Elijah Cummings said Obama told him that, if elected president, he would direct a Treasury Department official to work with homeowners in foreclosure to restructure their loans. Cummings said Obama also told him he’d seek changes in bankruptcy laws allowing judges to reduce what borrowers owe on their home loans.

Section 110 of the rescue legislation has the Orwellian title of “Assistance to Homeowners” — but only for the deadbeats.

It describes somebody called a “Federal property manager” who “holds, owns or controls mortgages, mortgage-backed securities, and other assets secured by residential real estate.”

Section 110 speaks of “modifications” that this manager can make to these mortgages including not only the reduction of interest rates but the reduction of loan principal.

Not only is Uncle Sam now the world’s largest landlord. He can also arbitrarily set the value of property and the amount owed on it at will, thus distorting the free market.

The vast majority of homeowners who pay their mortgages on time get the shaft. They’re the ones who’ll take up the others’ slack.

Why? And why is the Community Reinvestment Act still law?



How the massive rescue package will affect you

Some will benefit from tax breaks, but impact on markets will take time

By John W. Schoen
Senior producer
updated 3:35 p.m. ET, Fri., Oct. 3, 2008
John W. Schoen
Senior producer


Four days after the Bush administration’s financial rescue package ran off the rails in Congress, the House of Representatives gave the plan a second look and — after loading it up with a bunch of goodies — liked what they saw.

The plan, passed by the House and quickly signed into law by President Bush Friday, is supposed to jump-start the crippled credit markets and get the money flowing normally again to consumers, businesses, corporations and governments. But it remains to be seen whether it will work.

Here’s a look at what may — or may not — happen next.

Are my taxes going up to pay for this?
Over the long term nobody really knows, but in the short run, your taxes may actually go down. To get the bill passed, Congress loaded it up with more than $100 billion in tax breaks and other special provisions.

The biggest was a fix for the alternative minimum tax, a measure originally designed to make sure rich people paid their fair share. But over the years, millions of middle-income taxpayers have been mauled by the AMT beast. Many of those people will catch a break under the bailout bill.

Over the long run, though, those tax breaks will have to be made up with tax increases or spending reductions elsewhere. For decades, the rest of the world has been happy to loan its hard-earned savings to Uncle Sam to help our government fund its deficit spending. Those days are rapidly coming to a close.

Taxpayers also could be on the hook for some — but probably not all — of the $700 billion being used to buy up bad mortgage-backed investments, which the Treasury calls “troubled assets.”

How, exactly, is this going to work?
That’s still the $700 billion question. What Congress has done is to set up what amounts to a government-run hedge fund to buy up troubled securities that nobody else will buy because it is virtually impossible to figure out what they’re worth.

The reason is that no one can predict how many more homeowners will default on the mortgages backing up these investments. Once they do default, it’s even harder to predict how much the house backing the mortgage is worth.

Under the plan, the Treasury will buy these securities and hold them until credit and housing markets settle down, hoping that their value will increase. If so, Uncle Sam will make money. But no one has explained how the government will come up with the right price. Treasury officials have deflected any questions about what they call “implementation issues.”

In theory, the program will jump-start a market for these “trouble assets,” and private investors will then finish the job when they see what Treasury pays for the paper.

I keep hearing that the credit markets are “frozen.” But when I stick my ATM card in the machine, money still comes out. What’s the big deal? What do I care if these big Wall Street firms lose money?

The problem is that for better or worse, the global economy runs on credit. And that credit is drying up. It’s already harder to get a mortgage or a loan to buy a new car than it was even six months ago.

The credit drought has spread to the multitrillion-dollar pool of money that businesses use to fund their operations. The problem has begun to hit big companies such as General Electric, which recently had to pay 10 percent interest on what amounted to a private loan from Warren Buffett.

If that problem continues to spread, businesses will have to start laying off people faster than they already are. (Msnbc.com is jointly owned by Microsoft and GE’s NBC Universal unit.)

Will this keep the economy from getting worse?
If it works, it will prevent a deeper recession than otherwise would be expected. But it should not be expected to boost economic growth, according to the White House.

“No one should be overpromising what this bill will do,” White House spokesman Tony Fratto said Friday. “It’s not been sold as giving a boost to the economy — it’s to avoid a crisis.”

It could be months before the impact of this plan would be felt. Though the stock market can — and does — turn on a dime, the problem in the credit market is a lack of confidence. That takes longer to fix.

In the meantime, there are clear signs that the economy is still on a downward path. Friday’s employment report showed a ninth straight month of job losses. While the government’s official jobless rate held steady at 6.1 percent, that counts only people who are actively job hunting. If you count people who have given up looking, the so-called “augmented” jobless rate rose to 9.1 percent in September from 8.9 percent in August.

Consumers are nervous and are cutting back sharply on spending. Roughly two-thirds of the economy is based on consumer spending; if that spending slows further, so will the economy.

What about home prices?
In theory, repairing the credit markets could lower mortgage rates and make loans more available for home buyers. That boost in demand could help pull the housing market out of its deepest recession since the 1930s.

But it won’t help reduce the backlog of unsold homes — especially foreclosed, bank-owned homes that are being dumped on the market at fire-sale prices. Every time a bank sells a house cheaply to get it off their books, that price becomes the neighborhood’s new market rate.

It’s also harder for a lender to extend a loan for willing buyers in neighborhoods where home prices are still falling. That means buyers have to put up more money, reducing the number of eligible buyers.

Why isn’t more being done to stop foreclosures?
Good question. Many of the House Democrats who balked at approving the plan last week cited the lack of foreclosure relief as their biggest problem voting for the bill. Congress has been debating this issue for more than a year.

Various plans have been floated, but opponents insist that home buyers who borrowed more than they could afford should not be “bailed out” by the government. That’s one reason supporters of this emergency plan are calling it a “rescue” — not a “bailout” — of the financial system.

The debate over how to stop foreclosures will likely continue, though. Lenders say they’ve been working with homeowners to work out some of the worst mortgages written during the easy-money lending frenzy. But it’s been slow going.

Democrats have argued for more than a year that these voluntary efforts won’t fix the problem. Some want to change the bankruptcy law to let judges set new mortgage terms that will keep people in their homes. The idea came up again last week, but was shot down once more. If judges can cut payments on a mortgage, lenders say they’ll have to charge more for all mortgages to make up for that new risk.

Bottom line: Is all this going to work?
No one knows. Nothing like this has been done before — certainly not on this scale.



Bush signs bailout after House votes yes

Will bailout crimp Democrats’ spending plans?

Pelosi pledges bailout will not ‘dampen our ability to make investments’

Speaker of the House Nancy Pelosi
Speaker of the House Nancy Pelosi, D-Calif., in her office Friday awaiting the House vote on the financial sector rescue bill.


By Tom Curry
National affairs writer
updated 5:19 p.m. ET, Fri., Oct. 3, 2008

Tom Curry
National affairs writer

WASHINGTON – Friday’s House approval of an $800 billion bill to keep banks and investment firms afloat heralds a new fiscal era.

At first blush, an era of constrained federal spending appears to be dead ahead:  Every $1 billion going to the bailout and the tax provisions in the bill would be $1 billion less for highway construction or federal aid to public schools.

But House Speaker Nancy Pelosi and other Democratic leaders do not see it that way.


House Financial Services Committee Chairman Barney Frank, D-Mass., said shortly before the House voted that the cost of the bailout will not be $700 billion, but far less than that. For that reason, he said, the bailout will not inhibit the ability of Congress to spend on roads, bridges, public education and other items.

“It’s not going to cost $700 billion,” he said, referring to the bailout portion of the bill. “It’s going to cost something. We are buying assets with that money, which we will own and we will resell. Nobody knows what the net cost will be. … It depends on how the economy performs.”

Limp economy, robust federal spending
As Friday’s employment data indicated, the economy is not performing well right now. The Bureau of Labor Statistics reported that nearly 160,000 jobs were lost last month, the ninth straight month of net job losses.

Yet federal spending and borrowing are robust, with federal outlays growing nearly three times as fast as the economy itself.

The nonpartisan Congressional Budget Office reported that, as of August, federal spending for the first 11 months of the current fiscal year was 8 percent higher than in the same period the prior year.

But receipts are down 1.4 percent so far this fiscal year and are sure to decline further given the dismal employment data.

The revenue forecast facing the new president and the new Congress looks grim, largely due to that unemployment.

Fewer Americans are earning income and thus fewer are paying federal taxes. Higher unemployment means higher federal outlays for the Medicaid program for low-income people, as laid-off workers lose their employer-provided medical coverage.

‘Revenue is going to dry up’
That has many Republicans calling for restraint on spending.

“Revenue is going to dry up because we’re going into a recession, so you can’t whet your spending appetite when you have a recession and eroding revenues,” said Rep. Paul Ryan, R-Wis., the senior Republican on the House Budget Committee. Ryan voted for the bailout.

“We’re going to have lower revenues next year because I think a recession is unavoidable,” he said. “The question this (bailout) bill hopefully will answer is whether it is a short recession or a long recession.”

An increasing number of House Democrats, looking at Obama’s campaign momentum, assume he will be president. But many do not believe his and their spending desires will be limited by huge debt, borrowing costs and inflation.

Indeed, Obama made phone calls Wednesday and Thursday to several House Democrats, including freshmen members such as Rep. Mazie Hirono, D-Hawaii, and Rep. Betty Sutton, D-Ohio, assuring them that, if elected, he will sign a new economic stimulus spending bill.

At Pelosi’s press briefing Thursday, she indicated that the $800 billion is expected to be offset, in part, by congressional action raising tax rates on higher-income people.

Investing in the future’
And if the bailout bill ends up costing the Treasury money, she said, “the financial services industry and those affected by this would have to make up that shortfall.”

Turning to new spending, Pelosi used the word “invest” or “investment” five times in response to a question, using it in the accepted Capitol Hill sense: federal spending on items that Congress deems useful and likely to encourage economic growth.

“Nothing brings more money back to the Treasury than investing in the education of the American people,” she said.

She also argued for “investing in the future, whether it is infrastructure, whether it is investing in innovation to create good paying jobs in America, whether it is investing in our health care system in a way that reduces costs, reduces harm and improves health care.”

The spending would, she predicted, have the salutary effect of “creating good paying jobs, bringing jobs to America.”

Democrats won’t let the fiscal picture discourage them, Pelosi said.

And yet she also said, “We have said all along that when we go forward we do not want to increase the deficit.”

The paradox: How to spend more — much more — and yet not increase the deficit and borrowing at a time of sluggish income growth and with $800 billion in revenue potentially already spoken for?

Evoking Ronald Reagan
Using the phraseology of Ronald Reagan, Pelosi spoke of “subjecting the spending of the federal government to the harshest scrutiny to remove waste, fraud and abuse.”

And Pelosi assumes the $120 billion per year being spent on Iraq will go away fairly quickly.

But one longtime Pelosi ally, Rep. George Miller, D-Calif., the chairman of the House Education and Labor Committee, did not sound quite as bullish as the speaker.

Miller said, “I don’t know yet” when asked whether the bailout and tax extenders bill might inhibit Congress’ desire to spend more on domestic items.

“When you’re inheriting an $11 trillion debt, you have to have a fundamental conversation,” Miller said. “The new administration and the Congress have to decide, because there are so many unmet needs. Whether it will inhibit or not, or whether we’ll have to figure out another way to finance it, I don’t know yet.”

He added, “There’s a pent-up demand in the country for infrastructure, for research and development dollars. We’re falling way behind here.”


Lack Of Confidence, Not Capital, Is Issue

By INVESTOR’S BUSINESS DAILY | Posted Monday, September 29, 2008 4:20 PM PT

Rescue: As the financial turbulence in the U.S. spreads, we’ve heard talk, especially from overseas pundits, of a “crisis of capitalism.” But what we really have is a crisis of confidence, and the sooner it’s solved, the better.

Read More: Economy | Business & Regulation


The $700 billion rescue for the troubled global financial system foundered on a 228-205 vote Monday as both sides in the political debate feared being blamed for passing an unpopular bill.

Polls show more than 50% of Americans oppose what the pollsters call a “bailout” (but what we prefer to call a rescue). Meanwhile, a USA Today poll found that nearly a third of Americans think we’re in a depression.

Concern about the financial system is fully justified. But excessive gloom is not. In the most recent quarter, GDP rose 2.1% year over year, 3.1% excluding housing. Hardly a depression. So let’s not talk ourselves into one.

We, too, have qualms about the rescue effort. Washington under Democrat-led Congresses wrote the rules that made this mess possible, and we have little confidence in their ability to get us out of it.

We have even less confidence after watching Democrats try to insert things in the plan — from money for the radical community group ACORN to new taxes on Wall Street — that made no sense at all. We’re glad Republicans opposed these and made the bill better.

But now it’s time for all to hold their noses and vote as soon as possible on a compromise. Both the public and the investment community need to be reassured their leaders aren’t dropping the ball.

Failure won’t just cost billions; it will cost trillions — in lost output, a shrunken job market, smaller retirements and lost productivity. Is this the future we’ll choose for ourselves? We hope not.

Republicans who voted against the bill did so for legitimate reasons. They don’t like government getting too involved in the economy, and this package permits just that. But they also don’t want to be blamed, as the minority party, if the deal turns sour.

That’s already happening. Yes, more than 60% of Republicans voted against the rescue bill, but so did 40% of Democrats. That said, it’s time for Republicans to take a deep breath, pull up their pants and help pass a bill. The nation’s confidence is riding on it.

Americans must be made to realize it’s not Wall Street that’s being “bailed out,” as the media keep putting it. It’s Main Street.

The reason President Bush and Treasury Secretary Paulson moved so quickly and boldly is they fear a “seizing up” of financial markets. That means banks will stop lending to one another. It means companies that finance in the money markets — as many medium- and large-size businesses do — will be frozen out.

No lending, no business. Here’s where Main Street comes in. Thousands and maybe millions will be laid off as commerce grinds to a halt. That’s a real threat. Republicans will never get a perfect bill out of this Congress; compromises must be made by both sides.

We hope the $700 billion requested of Congress is enough to cover the problem. But we also note that on Monday, without Congress’ interference, the Fed made $630 billion available to world financial markets. That brings this rescue to $1.4 trillion.

The ability of the nation’s and the world’s financial markets to finance this shouldn’t be questioned. As the nonpartisan Congressional Budget Office noted Monday, the cost of any eventual rescue plan would likely be “substantially smaller” than $700 billion because of asset resales. And, around the world, there’s some $70 trillion or so in investment capital, according to estimates.

We’re not short on capital, as we said, but on confidence. Passing a bill, even if flawed, would go a long way to restoring the latter.


Bailout of Money Funds Seems to Stanch Outflow (WSJ)

Fear That Had Gripped $3.4 Trillion Market Abates,
Ending the Reluctance of Funds to Buy Vital Commercial Paper

The federal bailout of money-market funds seems to have stanched the outflow of investments that bedeviled the industry this past week — and ended the economy-threatening reluctance of the funds to buy vital commercial paper.

As news broke that the government will insure fund assets and the Federal Reserve will lend to funds, the fear that had gripped the $3.4 trillion money-fund realm abated. Larry Fink, chief executive of asset manager BlackRock Inc., which sponsors nine money funds, said the situation “is stabilizing.” The investor rush out of money funds appeared to end, and the commercial-paper market came back to life.

The news came too late for the embattled Reserve Primary Fund, which had helped touch off the crisis. Almost all the fund’s investors have requested withdrawals. On Friday, the fund, run by Reserve Management Co., announced it is suspending redemptions and delaying payment for longer than its previously disclosed seven-day hiatus.

On Friday, the U.S. Treasury said it was establishing a temporary guaranty program for the money-fund industry. For the next year, it is insuring retail and institutional funds, though not those investing exclusively in municipal and government debt. Funds must pay a fee to participate in the program.

The insurance program will be financed with as much as $50 billion from the Treasury’s Exchange Stabilization Fund, which was created in 1934. President George W. Bush had to sign off on Treasury’s use of the fund. Also, the Federal Reserve said it will essentially lend as much as $230 billion to the industry, via banks, to be used against their illiquid asset-backed holdings.

The withdrawals from money funds were stunning. They generated by far the highest redemptions on record, losing $144.5 billion through earlier this past week, according to AMG Data Services. The industry had only $7.1 billion in redemptions the week before.

The redemptions subsequently created huge problems for the $1.7 trillion commercial-paper market. Money funds weren’t buying the paper anymore and were dumping it to cash out fleeing investors. This threatened to tip the economy into recession by cutting off a vital funding source for U.S. business.

The funds’ push into Treasurys helped pull their short-term yields down to zero, which backfired on the money funds. On Friday, fund tracker Lipper said that more than 40% of the 1,263 U.S. taxable money-market mutual funds it tracks posted zero returns amid their negligible returns from their concentration in government paper.

As a result of money funds’ buyers strike, commercial paper became increasingly expensive, soaring to 8% yields from a little more than 2% the week before as investors demanded to get paid more for taking on increasing risk. Companies like International Business Machines Corp. had to pay as much as 6% for such borrowing this week.

The possibility of businesses shutting down for want of funding, said Paul Schott Stevens, the Investment Company Institute president, was bracing for the government. He told Washington officials of the worry conveyed by his talks with executives this past week at dozens of fund firms.

Although system-wide statistics for money funds weren’t immediately available Friday, anecdotal evidence suggests that the investor exodus was receding, barring some new eruption.

Some money-fund customers canceled plans to redeem their investments in cash, according to Legg Mason, which manages $187 billion in money funds. Meanwhile, funds across the industry that had charged into the relative safety of Treasurys reversed course.

At Federated Investors Inc., which manages more than $240 billion in money funds, fund manager Deborah Cunningham noticed a swift decline in calls from worried clients on Friday. The tone of money-fund investors who did call, she said, “is a thousand times lighter.” Instead of asking about the funds’ exposure to troubled names like Lehman Brothers Holdings Inc. and American International Group Inc., “today’s question is: are you going to participate in the insurance,” she says. Federated money funds don’t own Lehman or AIG paper.

Investors’ historic run on money funds began after one of the largest, Reserve Primary Fund, on Tuesday “broke the buck,” or went under the sacrosanct $1-a-share net asset value. The cause was its debt holdings in Lehman, which went to zero when the firm filed for bankruptcy. The fund’s dip under $1 NAV eroded investors’ confidence, causing them to pull out in droves across money funds on Wednesday and Thursday. That stampede out the door caused another prominent fund, the $12.3 billion Putnam Prime Money Fund (Institutional) to shut down on Thursday.

While the stock market cheered the federal rescue plan, small bankers decried the Federal Deposit Insurance Corp.-like protection extended to money funds. Camden R. Fine, head of the Independent Community Bankers of America, cautioned that the federal plan risked draining funding from small banks.

Fallout from the Reserve fund debacle continued. Ameriprise Financial announced on Friday that it has filed a suit in U.S. District Court in Minnesota against the fund’s parent, Reserve Management. Ameriprise and a subsidiary hold more than 300,000 retail-client accounts in the fund. Third Avenue Institutional International Value Fund also filed a suit on Friday in U.S. District Court in the Southern District of New York alleging, among other things, that Reserve misled investors earlier in the week about its ability to preserve $1 net asset value. Reserve declined requests for comment.


—Anusha Shrivastava contributed to this article.

Write to Diya Gullapalli at diya.gullapalli@wsj.com and Shefali Anand at shefali.anand@wsj.com