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Is the U.S. Going Broke?
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Author Topic: Is the U.S. Going Broke?  (Read 54592 times)
Posts: 105

« on: September 22, 2008, 06:13:07 AM »

Laurence J. Kotlikoff 09.04.08, 6:00 PM ET
Forbes Magazine dated September 29, 2008

Now that the federal government has bailed out Fannie and Freddie, who's going to bail out the federal government?
The federal government's takeover of Fannie Mae and Freddie Mac (nyse: FRE - news - people ) represents a huge financial tremor. These two institutions now issue 70% of Americans' mortgages. Their failure would have triggered a complete meltdown in housing and financial markets. So now Uncle Sam is on the hook for $5 trillion, consisting of corporate debt owed by those two institutions and mortgage debt guaranteed by them.

If only the government's total debt were that low. Uncle Sam, for all his righteous indignation, is, in fact, the father of all deceptive accounting. The government has arranged its budgeting to keep the great bulk of its liabilities off the books and out of sight.

The real liability facing our government is $70 trillion. This represents the present value difference between all the government's projected future spending obligations and all its projected future tax receipts. This fiscal gap takes into account Uncle Sam's need to service official debt--outstanding U.S. government bonds. But it also recognizes all our government's unofficial debts, including its obligation to the soon-to-be-retired baby boomers to pay their Social Security and Medicare benefits.

Given current policies, each of the 78 million boomers can expect, on average, to receive $50,000, in today's dollars, from these programs in each and every year of retirement. Multiply 78 million boomers by a $50,000 annual payment and you get close to $4 trillion per year. This helps you see why our nation's true indebtedness is so extraordinarily high.

There are other obligations, too, that aren't calculated into the national debt, or even in the $70 trillion, but for which the government remains at risk. House prices haven't stopped falling. They are down 20% from their peak two years ago. But they remain 70% above their value in early 2000. That was the year prices started going crazy. If the price pendulum swings back to 2000, we'll see the mortgage default rate, currently at a record 9%, soar. We'll also see more Americans file for personal bankruptcies and default on their credit cards. This will put many more financial institutions under water. The Federal Deposit Insurance Corp. has $45 billion on hand to cover bank failures, such as that of Indymac earlier this year, which cost the FDIC $9 billion. Large-scale bank failures could leave the FDIC short hundreds of billions of dollars. The total of insured deposits in this country is $4.5 trillion.

These are the devils we don't know. What about the one we do know--the $70 trillion one? How do we pay for that? One option is doubling employer plus employee payroll tax rates immediately and permanently. That would take another 15% out of our pockets each payday. Not likely to happen.

Another option is to cut benefits. Medicare could be scaled back to keep its cost growth in line with the growth in the economy. Social Security is 20% underfunded, which means that its taxes have to go up or its future benefits have to come down. But neither presidential candidate is acknowledging our nation's true insolvency, let alone providing real solutions (such as raising the retirement age or indexing benefits to prices rather than wages).

The decline in the dollar and our low national saving rate reflect an old policy of the government living beyond its means. If you look at all the extra consumption, it's occurring in large part among the elderly and, in large part, in the form of health care. This is not oldster bashing. We need to care for older Americans, but we need to do so in a way that doesn't constitute fiscal child abuse.

There is still time, and there are ways to put our fiscal house in order. But the longer we wait, the more likely we're going to get hit by a true financial and economic earthquake.

The earthquake will come via a collapse in the market for U.S. government bonds as domestic and foreign investors realize that the only way Uncle Sam can meet his future spending obligations is to print massive quantities of money. The result will be sky-high inflation and interest rates and, most surely, a prolonged reduction in output and employment. This could happen today. It could happen tomorrow. But it will happen here just as it has happened in every other country that tried to spend far beyond its ability to pay.

Having our government acknowledge and fix its long-term fiscal crisis will provide our financial industry something it so desperately seems to need--an honest financial role model.

Laurence J. Kotlikoff is a professor of economics, Boston University, and coauthor (with Scott Burns) of Spend 'Til the End .
Posts: 72

« Reply #1 on: September 23, 2008, 05:38:17 AM »

All true, and very scary.  I don't think the Feds can fix this problem.  However, they could stop the bleeding by capping spending on nonessential items.  And I would classify that as any spending that does not directly benefit WORKING TAXPAYING Americans and business.  Then follow China's lead by punishing those responsible.  That would include the board of directors, chairman of the board, CEO, CFO, AND COO of all the companies that received bail outs.  They should give back their salaries, and bonus's for the past four years, be denied their pension, and black balled from from working in the financial industry.  Those companies that survive should return all the bail out money to the Feds who in turn should return every penny to every entity that payed taxes during the past four years.  Capitalism only works when bad decisions result in failure.  Bailing out incompetent companies smacks of socialism.
Posts: 188

« Reply #2 on: September 23, 2008, 06:05:43 AM »

SO, who is going to bail me out?  Why, me of course because I have the serenity to accept the things I cannot change, courage to change the things I can, and the WISDOM to know the difference.  AMEN

GOD , I'm still here!
Posts: 105

« Reply #3 on: September 23, 2008, 10:39:56 AM »

And now the Bush administration wants to hand Paulson $700 billion so he can buy up all the garbage paper that's responsible for this mess from financial institutions without any oversight whatsoever. Paulson is in charge now, and the coronation is set for sometime this week.

Market Ticker's Karl Denninger summed this up best:

"This is the de facto nationalization of the entire banking, insurance and related financial system..That's right - every bank and other financial institution in the United States has just become a de-facto organ of the United States Government, if Hank Paulson thinks they should be, and he may order them to do virtually anything that he claims is in furtherance of this act.....The bill gives Paulson the ability to nationalize unlimited amount of private debt and force you and your children to pay for it."
« Last Edit: September 23, 2008, 10:46:39 AM by Admin » Logged
Posts: 72

« Reply #4 on: September 24, 2008, 06:10:14 AM »

Nationalization...let's see, what countries do that?  Russia, Cuba, China, Venezuela, and a host of other dictatorships.  That sounds like a good idea.  I think this may be a good time to dust off the Constitution and start over again.
Posts: 105

« Reply #5 on: September 24, 2008, 10:03:51 AM »

Why did Paulson and Bernanke, wait till the last minute to spring this bailout proposal on Congress, considering that the White House had drawn up this proposal over "previous months and weeks". "Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials."

Karl Denninger summed it up like this:

"If this was being prepared for "some time" then the "emergency" status was manufactured.  Instead of bringing this before Congress "months and weeks" ago for consideration where it could be debated and passed, ready if necessary, The White House and Treasury instead back-pocketed their plan and then sprung it on Congress with an outrageous and ill-advised "bump in the night, Freddy Kreuger style" scare campaign at the last possible minute in an attempt to give Treasury dictatorial power over our entire financial system."

Why Paulson is Wrong
Luigi Zingales
Robert C. Mc Cormack Professor of Entrepreneurship and Finance
University of Chicago -GSB
When a profitable company is hit by a very large liability, as was the case in 1985 when
Texaco lost a $12 billion court case against Pennzoil, the solution is not to have the
government buy its assets at inflated prices: the solution is Chapter 11. In Chapter 11,
companies with a solid underlying business generally swap debt for equity: the old equity
holders are wiped out and the old debt claims are transformed into equity claims in the
new entity which continues operating with a new capital structure. Alternatively, the
debtholders can agree to cut down the face value of debt, in exchange for some warrants.
Even before Chapter 11, these procedures were the solutions adopted to deal with the
large railroad bankruptcies at the turn of the twentieth century. So why is this wellestablished
approach not used to solve the financial sectors current problems?
The obvious answer is that we do not have time; Chapter 11 procedures are generally
long and complex, and the crisis has reached a point where time is of the essence. If left
to the negotiations of the parties involved this process will take months and we do not
have this luxury. However, we are in extraordinary times and the government has taken
and is prepared to take unprecedented measures. As if rescuing AIG and prohibiting all
short-selling of financial stocks was not enough, now Treasury Secretary Paulson
proposes a sort of Resolution Trust Corporation (RTC) that will buy out (with taxpayers’
money) the distressed assets of the financial sector. But, at what price?
If banks and financial institutions find it difficult to recapitalize (i.e., issue new equity) it
is because the private sector is uncertain about the value of the assets they have in their
portfolio and does not want to overpay. Would the government be better in valuing those
assets? No. In a negotiation between a government official and banker with a bonus at
risk, who will have more clout in determining the price? The Paulson RTC will buy toxic
assets at inflated prices thereby creating a charitable institution that provides welfare to
the rich—at the taxpayers’ expense. If this subsidy is large enough, it will succeed in
stopping the crisis. But, again, at what price? The answer: Billions of dollars in taxpayer
money and, even worse, the violation of the fundamental capitalist principle that she who
reaps the gains also bears the losses. Remember that in the Savings and Loan crisis, the
government had to bail out those institutions because the deposits were federally insured.
But in this case the government does not have do bail out the debtholders of Bear Sterns,
AIG, or any of the other financial institutions that will benefit from the Paulson RTC.
Since we do not have time for a Chapter 11 and we do not want to bail out all the
creditors, the lesser evil is to do what judges do in contentious and overextended
bankruptcy processes: to cram down a restructuring plan on creditors, where part of the
debt is forgiven in exchange for some equity or some warrants. And there is a precedent
for such a bold move. During the Great Depression, many debt contracts were indexed to
gold. So when the dollar convertibility into gold was suspended, the value of that debt
soared, threatening the survival of many institutions. The Roosevelt Administration
declared the clause invalid, de facto forcing debt forgiveness. Furthermore, the Supreme
Court maintained this decision. My colleague and current Fed Governor Randall Koszner
studied this episode and showed that not only stock prices, but bond prices as well,
soared after the Supreme Court upheld the decision. How is that possible? As corporate
finance experts have been saying for the last thirty years, there are real costs from having
too much debt and too little equity in the capital structure, and a reduction in the face
value of debt can benefit not only the equityholders, but also the debtholders.
If debt forgiveness benefits both equity and debtholders, why do debtholders not
voluntarily agree to it? First of all, there is a coordination problem. Even if each
individual debtholder benefits from a reduction in the face value of debt, she will benefit
even more if everybody else cuts the face value of their debt and she does not. Hence,
everybody waits for the other to move first, creating obvious delay. Secondly, from a
debtholder point of view, a government bail-out is better. Thus, any talk of a government
bail-out reduces the debtholders’ incentives to act, making the government bail-out more
As during the Great Depression and in many debt restructurings, it makes sense in the
current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the
financial sector. It has the benefit of being a well-tested strategy in the private sector and
it leaves the taxpayers out of the picture. But if it is so simple, why no expert has
mentioned it?
The major players in the financial sector do not like it. It is much more appealing for the
financial industry to be bailed out at taxpayers’ expense than to bear their share of pain.
Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of
private property rights than a massive bailout, but it faces much stronger political
opposition. The appeal of the Paulson solution is that it taxes the many and benefits the
few. Since the many (we, the taxpayers) are dispersed, we cannot put up a good fight in
Capitol Hill; while the financial industry is well represented at all the levels. It is enough
to say that for 6 of the last 13 years, the Secretary of Treasury was a Goldman Sachs
alumnus. But, as financial experts, this silence is also our responsibility. Just as it is
difficult to find a doctor willing to testify against another doctor in a malpractice suit, no
matter how egregious the case, finance experts in both political parties are too friendly to
the industry they study and work in.
The decisions that will be made this weekend matter not just to the prospects of the U.S.
economy in the year to come; they will shape the type of capitalism we will live in for the
next fifty years. Do we want to live in a system where profits are private, but losses are
socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live
in a system where people are held responsible for their decisions, where imprudent
behavior is penalized and prudent behavior rewarded? For somebody like me who
believes strongly in the free market system, the most serious risk of the current situation
is that the interest of few financiers will undermine the fundamental workings of the
capitalist system. The time has come to save capitalism from the capitalists.
Posts: 105

« Reply #6 on: September 24, 2008, 06:28:50 PM »

Wednesday, September 24th, 2008

How Complex Securities, Wall Street Protectionism and Myopic Regulation Caused a Near-Meltdown of the U.S. Banking System

[In Part III of his three-story investigation of the credit crisis,Money MorningContributing Editor Shah Gilani details how the very complexity of the global financial system brought us to the brink of a total meltdown. In a special addendum tomorrow (Thursday), the former professional trader and hedge-fund manager will detail a banking-system overhaul that would immediately end the credit crisis - possibly without a single penny of taxpayer money.]

By Shah Gilani
Contributing Editor

There’s no time to beat around the bush. Let’s flush out the three credit-crisis catalysts that have remained hidden for too long, thanks to Wall Street protectionism and myopic regulation. Those catalysts - which brought us to the brink of a financial meltdown - are structured collateralized debt obligations, credit default swaps, and the horrific offspring of the two - credit default swaps on structured collateralized debt obligations.

An asset-backed security (ABS) is a type of tradable debt security that’s derived from a pool of underlying assets. We could be talking about a pool of mortgages, of automobile leases, or loans made to various borrowers. We’re using the example of residential mortgages, though the example is exactly the same for commercial mortgages, automobile leases or bank loans. Here’s how it works.

Anatomy of Mortgage Loan
A mortgage company makes home loans in your county, as does your local bank branch. Then an investment bank comes along and buys the mortgages from the mortgage company and from the bank. It only wants to buy the mortgages made to prime borrowers who are paying 6% interest on their mortgages. Once it acquires those loans, the investment bank securitizes the mortgages, meaning it pools them into a tradable package it can sell to investors.

This particular pool is known as a "closed pool," meaning no more mortgages will be added, though some may leave the pool if the underlying borrowers pay back their mortgages early because they sold their homes, or refinanced them, or if underlying mortgages are in default and the "servicer" allows them to be removed from the pool. The only income coming into the closed pool results from the monthly interest and principal payments being made by the homeowners.

In our example - because all the mortgage loans were made to so-called "prime" borrowers with strong credit - you might have an investment grade (A+) security that pays 6%, because all the mortgage holders are paying 6% and the payments are being passed through to the investors. That’s it. There are very good, though not exact, methodologies to value this particular security, primarily because it is uniform in that all the mortgage payers are prime borrowers who all are paying 6%.

Asset-backed-securities become infinitely more complicated when they are sliced and diced into structured collateralized instruments. They generally fit into two main categories:

Collateralized debt obligations (CDOs), which include all manner of residential and commercial mortgage-backed securities.
And collateralized loan obligations (CLOs), which are pooled bank and investment-bank loan portfolios.
CDOs and CLOs are created from "closed-pool," asset-backed securities. They are collateralized by the underlying assets - hence the prefix - but they are also "structured."
In our example above, our asset-backed mortgage security was rated A+ and pays the investor who buys it 6%. If I want to create higher-yielding securities that I think I will be able to sell a lot more of, I will pool mortgages from subprime borrowers.
Because subprime borrowers are, by definition, higher-risk borrowers, the mortgage companies and banks charge them higher rates of interest to offset the greater risk that they represent. If I pool these mortgages, their ratings would be "junk" - or close to it - which will be a problem as I try and sell these securities to investors all around the world.

That’s where the magic of financial engineering, better known as structuring, comes into play. I can divide up the closed pool of subprime mortgages and structure the pool into layers, or tranches. What I’ll do is divide up the pool into multiple tranches, or slices. I’ll structure the cash flow payments from all the mortgages so that if the 1st or 2nd tranches run into trouble, I’ll take cash flow payments from the lower tranches to keep up with all the payments to the holders of the 1st and 2nd tranches.

For someone trying to peddle these asset-backed securities, this is a stroke of genius. In our example, since I’m now pretty much guaranteeing that the 1st and 2nd tranche security holders are going to get paid, maybe I can get the Big Three debt-rating companies - Standard & Poor’s, Moody’s Investors Service (MCO) and Fitch Ratings Inc. - to give my 1st and 2nd tranche CDOs’ investment grade ratings. Maybe I can even buy insurance from a monoline insurer like AMBAC Financial Group Inc. (ABK) or MBIA Inc. (MBIA), and get my top tranches a coveted "AAA" rating. Wow, I could sure sell a lot of this high-yielding stuff with an investment grade rating!

That’s just what happened. And they did sell a lot - a whole lot.

Those Troubling Tranches
As I said in Part II of this investigative series, CDOs - on an individual basis - are difficult to value. Indeed, "legend has it that constructing the cash flow payments on the first theoretical 3-tranche CDO (the simplest type of CDO) took a Cray Inc. (CRAY) supercomputer 48 hours to calculate.

The problem starts here. There are so many of these tranched securities out in the marketplace - and on the balance sheets of banks, investment banks, insurance companies, hedge funds and all manner of other unsuspecting investment entities worldwide - that when subprime borrowers began to default, it wasn’t long before the lower-tier tranches ran out of money to pay the so-called 1st- and 2nd-tier "AAA"-rated securities. The problem escalated quickly and almost all of these securities were downgraded. That’s not a surprise. Nor is it the whole story, for it leaves a key question unanswered.

What happened to the lowest-level tranches?

Those tranches were "ugly" to begin with because I started by pooling subprime mortgages (the high-risk borrowers). Then I made them "toxic" by "stripping out" their cash flow to support other tranches. This toxic waste was so bad, no one would ever rate it and only greedy hedge funds or crazy speculators would buy it for its high yield. Or, maybe, I think so much of my creation that I’ll keep this piece for myself, or maybe I’ll have to because no investor will ever buy it.

This kind of stuff is out there. There’s a lot of it. And only an act of God will bring these securities back from the depths where they now reside.
With their collateralized premise and structured nature, CDOs are very difficult to value - especially since no one trusts anyone else’s "internal valuation model." Since everyone is afraid of these securities because no one really knows what they’re actually worth, no one wants to buy them.
However, when an institution - such as a Merrill Lynch & Co. Inc. (MER) - gets desperate enough to sell a portfolio of these securities at 22 cents on the dollar, then everyone else who has to "mark-to-market" their assets now has to value similar securities of their own at 22 cents on the dollar. That causes massive write-downs at banks, investment banks, insurance companies, and other financial institutions. And these companies write down assets and watch their losses escalate, they are forced to raise additional capital to meet regulatory requirements.

CDS - Controlled Dangerous (Financial) Substances
It’s a vicious cycle - one that’s eroding our faith in our banks, and worse, banks’ faith in other banks. As a result, banks have ceased lending to each other out of the fear that the next round of write-downs and losses may imperil some of the trading partner banks that they used to lend billions of dollars to every night.

Not anymore.

It would be bad enough if that were the only problem facing the securities market. On top of these overly engineered structured securities I’ve just discussed, we also have credit default swaps with an estimated notional value of $62 trillion out in the marketplace. A credit default swap (CDS) is a financial derivative that’s akin to an insurance policy that a debt holder can use to hedge against the default by a debtor corporation, or a sovereign entity. But a CDS can also be used to speculate.

In Part II of our investigation, which ran Monday, I explained how problematic credit default swap pricing is and how the indexes against which the value of these swaps are determined are tradable themselves as speculative instruments and how the whole complex is driving the financial system into an abyss. That’s essentially what led to the collapse of the otherwise healthy insurance giant, American International Group Inc. (AIG). [For the latest news on AIG, check out this related story elsewhere in today’s issue of Money Morning.]

Unfortunately, I don’t see the U.S. Treasury Department’s much-needed rescue plan being effective without actually addressing the problems facing both the CDO and the CDS markets. The Treasury Department’s initiative will create more problems than they attempt to solve and will eventually saddle taxpayers with so much debt that they risk sinking the dollar, and worse, the U.S. government’s investment grade rating. That would be calamitous. [For the latest news on the federal government’s banking-system bailout plan, check out this related story elsewhere in today’s issue of Money Morning.]

Tomorrow (Thursday) in Money Morning, in an addendum to this piece, I will outline a proposal that I’m calling the Money Morning Plan because it potentially heralds a new dawn in the credit crisis, addressing the problems from the bottom up, and not from the top down. Although this plan is straightforward and elegant in its simplicity, we still opted to present it as a separate story in order to provide you with the focus, the detail and the explanations we feel this strategy merits.

If the Treasury Department wants to immediately triage the gushing wounds that are bleeding our banks and financial system dry of readily available credit by purchasing and warehousing illiquid assets with taxpayer money, it won’t be long before the U.S. financial system begins to hemorrhage somewhere else.

The free market caused these problems under the noses of undistinguished regulators.

The free market - with the oversight of good governance practices mandated by effective regulators, who should not be empowered to kill entrepreneurial capitalism - will once again rise to the occasion and prove America’s robustness and indefatigable spirit.

[Editor’s Note: Contributing Editor R. Shah Gilani has toiled in the trading pits in Chicago, run trading desks in New York, operated as a broker/dealer and managed everything from hedge funds to currency accounts. In this special three-part investigation, Gilani has drawn upon the experiences and network of contacts that he developed through the years to provide Money Morning readers with the "real story" of the credit crisis. But this financial inner-sanctum insider will take this story one step further. Tomorrow (Thursday), Gilani will detail a plan that will spare the taxpayers, save the dollar and preserve the United States’ pristine credit rating. It’s a perspective on the near-financial meltdown that you’ll find nowhere else but in Money Morning. If you missed earlier installments of Gilani’s investigative series, Part I appeared Friday, and Part II ran Monday.]

The Money Morning Plan

   1. Establish an empowered, not overpowering, regulatory apparatus to rein-in structured products and establish protocols for the creation and tradability of financial products based on real-world economics and hedging considerations. Products must be transparent, easily valued and rated on a universal ratings model.

   2. Establish regulated standards to support the universal ratings model and allow free-market competition for providing rating services based on a "pooled-income revenue model," whereby all issuers that either want to be rated, or that are required to be rated, pool funds on a per-volume, pro-rata basis and ratings providers are paid blindly for rating services.

   3. Immediately stop the issuance of credit default swaps without mandatory reserve requirements and safeguards typical of what insurance regulations already require of legitimate insurers. Net out all existing credit default swaps to tighten counterparty risk and unwind positions that cannot be secured by issuers meeting adequate reserve requirements. Eliminate virtual insurers.

   4. Only allow issuance of credit default swaps up to the actual outstanding dollar value of corporate debts and loans outstanding. This will ensure legitimate hedging and eliminate undue pressure on outstanding debt issuers.

   5. Create a class of "eligible (mortgage-related only) securities" that constitutes problem securities. Leave all eligible securities on the books of existing holders.

   6. Have eligible security holders identify to the U.S. Federal Reserve every eligible security by CUSIP and face amount. Only the Fed will have knowledge of institutional and investor positions. This will allow the Fed to correctly assess the risks at hedge funds and others with "significant operations" without exposing their positions to competitors.

   7. Create a new accounting domain in-between "held-to-maturity" and "available-to-trade" where only eligible securities, as of a predetermined valuation date, can be accounted for at their value on the predetermined valuation date and not further subject to fair-value (marked-to-market) accounting, while held.

   8. Mandate all holders of eligible securities mark-to-market inventories on a predetermined valuation date, preferably as soon as the Fed expects all eligible securities to be registered with it. Those who have recently marked their securities have already taken their write-downs; those who haven’t will have to. If the totality of the resolution represents a bona-fide solution, investors and speculators will bid up eligible securities to own them before the predetermined valuation date, because of newly ascribed accounting advantages of holding eligible securities.

   9. Reduce the haircut on the reserve requirements for all eligible securities covered by this plan. Since valuations have already fallen precipitously, reducing reserve requirements on eligible securities would additionally enhance their value as balance-sheet assets with upside potential.

  10. Have both the Fed and Treasury determine a liquidation or receivership outcome for holders suffering from insolvency as a result of accurately marking-to-market their holdings on the predetermined valuation date in the event bankruptcy would result in further systemic problems. This scenario would be cheaper and quicker to manage than what’s in store for us under the present Treasury draft, and it allows the two to assess the potential fallout of insolvent entities prior to their exposing the financial system to resulting disruptions. Hedge funds would not be saved.

  11. The Fed must establish and manage a conservative, transparent pricing model for eligible securities based on actual underlying cash-flow measures, projections and model specific criteria. Absolutely no trading would be allowed over-the-counter or otherwise on any of the eligible-securities specific pricing models or indexes.

  12. The Fed, with a firm handle on all eligible securities and a transparent-pricing methodology, would have to take in any and all eligible securities as collateral against Fed borrowings from the discount window or through its dealer facility.

  13. "Servicers" managing underlying mortgages on behalf of trust entities, under which securitized pools are created, must be empowered to alter and modify terms and conditions of underlying mortgages in conjunction with originating banks or lending institutions.

  14. To incentivize banks and lending institutions to modify existing mortgages and to incentivize homeowners to stay in homes with upside-down mortgage-to-appraised values, eliminate all capital gains on appreciation of newly appraised homes when they are sold by either homeowners, banks or lending institutions.

  15. Create tax-advantaged scenarios for banks and homeowners partnering in the reduction of delinquent obligations whenever loans can be brought to a performing status.
« Last Edit: September 26, 2008, 07:58:42 AM by Admin » Logged
Posts: 72

« Reply #7 on: September 24, 2008, 07:42:33 PM »

Mortgage crisis...if you bought a home you couldn't afford, that's not my problem.  You should lose your home and buy one you CAN afford.  If you loaned money to someone who couldn't afford to pay you back, that's not my problem.  You lose, file for bankruptcy.  Gas/oil prices, drill here, drill now, and develop alternate sources of energy.
Posts: 105

« Reply #8 on: September 25, 2008, 07:35:30 AM »

This bailout is nothing short of welfare for the rich. That's right the ceo's of financial institutions that have made hundreds of millions of dollars in the past 6 or 8 years, and giving none of it back, while driving their companies into the ground now need the federal government (tax payer) to save them.  huh
Posts: 188

« Reply #9 on: September 25, 2008, 10:04:33 AM »

AMEM!  Fix the disease; not the symptoms.

GOD , I'm still here!
Posts: 105

« Reply #10 on: September 25, 2008, 04:31:58 PM »

Ron Paul: My Answer to the President

September 25, 2008

Dear Friends:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market’s attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I’d only be repeating what I’ve been saying over and over - not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration “is working with Congress to address the root cause behind much of the instability in our markets.” Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that “low interest rates” led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or “wildcat capitalism” (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: “Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.”

Doesn’t that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn’t that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn’t the federal government shown that the “many” who “believed they were guaranteed by the federal government” were in fact correct?

Then come the scare tactics. If we don’t give dictatorial powers to the Treasury Secretary “the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet.” Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It’s the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks’ manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end… It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a “rescue plan”? I guess “bailout” wasn’t sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you’re supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,

Ron Paul
Posts: 72

« Reply #11 on: September 25, 2008, 06:16:32 PM »

"The only thing we learn from history, I am afraid, is that we do not learn from history."  That, I'm afraid, is the reason for most of our international, national and personal problems.  Most humans can only remember the events that happened in their own life times.
Posts: 105

« Reply #12 on: September 25, 2008, 07:16:44 PM »

"Most humans can only remember the events that happened in their own life times."

You'd think they'd be learning this stuff in school. I think that most people have the "It can't happen here" mentality.

Meanwhile more historic economic news:

WaMu becomes biggest bank to fail in US history
Friday September 26, 1:36 am ET
By Marcy Gordon, Sara Lepro and Madlen Read, AP Business Writers
JPMorgan Chase buying Washington Mutual's assets for $1.9 billion after FDIC seizes bank

NEW YORK (AP) -- As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks -- Washington Mutual Inc. -- has collapsed under the weight of its enormous bad bets on the mortgage market.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.

One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.

Because of WaMu's souring mortgages and other risky debt, JPMorgan plans to write down WaMu's loan portfolio by about $31 billion -- a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.

"We're in favor of what the government is doing, but we're not relying on what the government is doing. We would've done it anyway," JPMorgan's Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.

WaMu is JPMorgan Chase's second acquisition this year of a major financial institution hobbled by losing bets on mortgages. In March, JPMorgan bought the investment bank Bear Stearns Cos. for about $1.4 billion, plus another $900 million in stock ahead of the deal to secure it.

JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holdings Inc. going bankrupt and American International Group Inc., the world's largest insurer, getting taken over by the government.

JPMorgan also said Thursday it plans to sell $8 billion in common stock to raise capital.

The downfall of WaMu has been widely anticipated for some time because of the company's heavy mortgage-related losses. As investors grew nervous about the bank's health, its stock price plummeted 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse.

WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were also reportedly possible suitors. WaMu was believed to be talking to private equity firms as well.

The seizure by the government means shareholders' equity in WaMu was wiped out. The deal leaves private equity investors including the firm TPG Capital, which gave WaMu a cash infusion totaling $7 billion this spring, on the sidelines empty handed.

WaMu ran into trouble after it got caught up in the once-booming subprime mortgage business. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.

Problems in WaMu's home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005.

At the start of 2007, following the release of the company's annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its subprime mortgage lending and servicing of loans. Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank, replaced Killinger earlier this month.

As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.

At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made subprime loans.

In December, WaMu said it would shutter its subprime lending business and reduce expenses with layoffs and a dividend cut.

The bank in July reported a $3 billion second-quarter loss -- the biggest in its history -- as it boosted its reserves to more than $8 billion to cover losses on bad loans. Over the last three quarters, it added $10.9 billion to its loan-loss provisions.

JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company.

JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states, and that it plans to close less than 10 percent of the two companies' branches.

The WaMu acquisition would add 50 cents per share to JPMorgan's earnings in 2009, the bank said, adding that it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010.

"This is a definite win for JPMorgan," said Sebastian Hindman, an analyst at SNL Financial, who said JPMorgan should be able to shoulder the $31 billion writedown to WaMu's portfolio.

AP Business Writers Marcy Gordon in Washington and Sara Lepro in New York contributed to this report.
Posts: 72

« Reply #13 on: September 25, 2008, 07:25:43 PM »

  The F.D.I.C. only insures the first $100K.  So, if a financial institution fails, people who did the right thing by SAVING rather than SPENDING will lose everything in excess of $100K.  The bail out will save those companies and executives who did the wrong thing.  It does nothing for those who did the right thing.  Spending is rewarded, saving is punished.  
  And, what about energy?  The environmentalists and their political friends have prevented America from providing it's own sources.  As a result, we import 70% of our oil from nations that hate us.  
  AND, Fannie May/Freddie Mac should be vaporized.  
  Most politicians have legal backgrounds.  We need more politicians with science and economic backgrounds.
Posts: 105

« Reply #14 on: September 25, 2008, 09:10:17 PM »

I like her style! Rep. Marcy Kaptur D-Ohio, 9th District Toledo


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