[Rhodes22-list] Brad, Economics/Politics - Significant Post about economic and politicalmess

[Brad Haslett]

Herb,

More good analysis from a blogger is attached.  His thoughts on Franks
parallels mine.  Remember, our current Congress has an approval rating
lower than Bush 43's.  Now would be a good time to act like adults and
actually represent the nations best interests.

Brad

---------------------

A Tale of Two Financial Crises

Posted by: Blackhedd

Monday, September 22, 2008 at 05:44AM

40 Comments

We're now into our second day of market reactions to the Treasury and
Fed's Troubled Assets Relief Program ("TARP"), or if you prefer,
Mother of All Bailouts ("MOAB"). Market reaction in general is quite
positive, which I'll get to shortly. But the action is moving to
Capitol Hill, where Paulson and Bernanke need to convince Congress to
pass enabling legislation for the plan before they leave on Friday to
face the voters. I'll tell you how that's going so far. And I'll also
tell you what questions Congress needs to ask, so that we all can get
a better understanding of how the TARP will actually work.

Two Crises

We face not one but two financial crises: a liquidity crisis and a
credit crisis.

Both ultimately stem from declines in the value of securities and
derivatives that are based on mortgages. But the liquidity crisis
primarily affects the financial system in the near term, while the
credit crisis affects the larger economy and is a longer-term problem.

And markets have responded favorably to news of the TARP, because it's
widely expected to relieve the near-term disruptions that have rolled
through the financial world like one Category-5 hurricane after
another.

The reason markets are in acute crisis is because the failure or
near-failure of so many important institutions (including Fannie Mae,
Freddie Mac, Lehman Brothers, Merrill Lynch, AIG Insurance, and many
others) makes normal trading impossible.

You can't trade with someone you're not sure won't be bankrupt
tonight. And when "someone" is just about every big name out there,
that means you practically can't trade with anyone.

The Darkest Night

That drives a flight into the safest and most liquid assets, even at
the cost of losing money. In the darkest hours of the crisis last
week, which came as you were asleep on Wednesday night and Thursday
morning, interest rates on short-term Treasury debt became literally
negative for brief periods of time.

And money-markets showed nearly half a trillion dollars in sell orders
that night, by some accounts. If this hadn't been stemmed by an
extraordinary intervention by the Federal Reserve at 3am EDT that
morning, it's possible that there might not have been enough money in
the bank for the company where you work to open its doors that
morning.

To say that we came to the edge of Armageddon last week may be
understating the case.

Pulling Out The Biggest Weapon

After 24 hours of extreme tension, the Treasury leaked word of the
TARP, an extraordinary program that will borrow money from world
markets, guaranteed by the taxpayers, to buy up to 700 billion
dollars' worth of a range of distressed assets from financial firms.

That news broke on Thursday afternoon around 3pm EDT. It was the
source of the roughly 800-point rally in US stock markets that you
heard about, and of the nearly orgasmic sigh of relief that went up
from trading desks all over lower Manhattan and elsewhere.

By Friday morning, the interest rate on short-dated discount Treasury
debt had gone from around 5 basis points (a level last seen in the
days following World War II) to a still low but workable 95 BPs or so,
where it stands this morning.

For now, markets have stabilized and the fever has broken.

And an acrimonious debate has broken out over the details of the plan.
The action shifts down the Atlantic corridor from New York to
Washington.

The Debate in Congress

Many well-respected conservatives are dead-set against the plan, which
of course is blatant socialism just as the RTC was. These voices are
screaming at the top of their lungs that the TARP should not go
forward.

These people need to look at the consequences of the instantaneous
return to extreme market instability that would take place if they got
their wish. This bailout plan is an absolute requirement.

Many liberals, on the other hand, are seeing an opportunity to embed
once again the perception that free markets just don't work. They're
trying to load the TARP special legislation with a raft of Democratic
goodies, including more handouts for people facing foreclosure,
additional funding for the hard-left ACORN and other "community
organizing" groups, and more support for cities that face revenue
shortfalls as foreclosures rise.

Secretary Paulson and Chairman Bernanke spent a good part of the
weekend on Capitol Hill with key lawmakers from both parties,
answering their questions about the TARP bailout plan. (Or not
answering them, depending on who you ask.)

The basic idea, according to draft legislation that I saw on Saturday,
is that Treasury will set up a two-year program to purchase a broad
range of assets from financial firms. The purchases will be funded by
sales of Treasury debt, which of course are guaranteed by the
taxpayers.

It's reminiscent of the RTC of the late Eighties and early Nineties,
which purchased the assets of failed savings-and-loan associations for
pennies on the dollar, and then sold them off over time. The end
result of the RTC was that taxpayers made a profit, and it's more than
likely that the TARP will end doing the same thing.

But there are some critical questions about how the TARP will work.

Questions for Mr. Paulson and Mr. Bernanke

The biggest and most important questions regard the valuation at which
the mortgage-backed securities will be purchased from the
participating banks and Wall St. firms.

How many pennies on the dollar? And who will make that determination?

Banks and Wall Street firms are suffering because they own large
amounts of mortgage-backed securities and related derivatives that are
now worth less than they paid for them. The losses mean that they
can't go forward from here and fund new investments in productive
business activity.

Ideally, you'd want to sell off your bad assets and either continue
life with a smaller balance sheet, or else raise additional equity
capital to start growing again. Neither option is available as things
stand.

The point of the TARP is to provide a bid for the bad mortgage-based
assets that, in Paulson's words, are "clogging the balance sheets" of
many financial institutions. He wants to provide a market so that
financial firms can sell these assets and get on with life.

The price at which they will be sold is all-important. Get it too low,
and you'll put a lot of firms out of business, because they will be
forced to realize capital losses they can't recover from.

Get it too high, and you'll be doing two extremely bad things: you'll
be rewarding banks and Wall Street for making bad decisions; and
you'll expose the taxpayers to losses and inflation.

So the key question for Paulson and Bernanke is: who will be
determining the valuation? You want above all to make sure that this
job is done right, which means getting the best available people from
the private sector to do it. How will they be compensated, and what
are their incentives?

Already Barney Frank is saying that the people who do the valuation
must not be allowed to make a lot of money. How do you get really top
people on that basis? Given the dire implications of getting this
wrong, it's charitable to say that Mr. Frank is being shortsighted and
probably a little vindictive.

The really deep problem I have, however, is this: what if the true,
correct valuation of distressed mortgage-backed assets is actually
very, very low? Like, say, five or ten cents on the dollar?

This outcome, if it happens, would be reflective of the fact that the
housing industry significantly overbuilt, in response to the price
bubble that burst in 2006. And that's a misallocation of resources
that simply can't be willed away by bailouts, taxpayer handouts to
Democratic constituencies, or fairy dust.

If that indeed is where we are, then the TARP will solve the near-term
liquidity crisis, but not the longer-term credit crisis. And the US
may be facing a long, possibly multiyear period of very slow economic
growth.

A lot like what Japan has gone through after their real-estate bubble
popped. In Japan, they call it "The Lost Decade."

All eyes on Ben Bernanke at this point. A close student of the Great
Depression, he understands deflation as few others do. He'll be
mouthing the same words as Paulson, to get us through this immediate
crisis.

But does he really believe we're addressing the longer-term problem?
That's a question I'd dearly like to know the true answer to.

-Francis Cianfrocca

On Mon, Sep 22, 2008 at 10:15 PM, Brad Haslett <flybrad at gmail.com> wrote:
> Herb,
>
> It goes back further than that.  Between Fannie & Freddie, FHA, and VA
> housing loans, and the home mortgage interest deduction, the federal
> 'gubment' has been waaaay too involved in the housing market.  My home
> loan is with the credit union where I bank and they hold the paper.
> Trust me, they made damn sure I was able to pay the money back before
> they made the loan. Like a lot of Depression era programs, Fannie may
> have sounded good in the beginning but should have been eliminated
> decades ago.  President Johnson spun off Fannie to a quasi
> private/public company to make his budget numbers look better and
> created Freddie for competition. The seeds of destruction were planted
> a long time ago. Ed posted a list of proposals and warnings from the
> Bush Whitehouse earlier - 43 was aware of the problem as well as the
> Congress, it was just cross-purpose with the liberal agenda.  However,
> as amusing as it is to study the history of this issue, it does
> nothing to solve the problem. I don't think most folks realize how
> close to the brink we came.  Here's a newspaper article on the
> experience and a really good analysis from an astute blogger.
>
> http://www.nypost.com/seven/09212008/business/almost_armageddon_130110.htm
>
> http://meganmcardle.theatlantic.com/archives/2008/09/how_close_was_the_financial_sy.php
>
> There's only two solutions to this problem that I can see, either
> flush the "turd" loans out of the system or give banks a reprieve on
> FASB 157 and temporarily suspend "mark to market" accounting. Nancy
> and Harry are clueless demagogues. There's plenty of smart people on
> both sides of the isle.  Now would be a good time for some real
> leaders of both parties to take control and tell some of the bigger
> mouths (Barney Franks for example) to STFU.
>
> Whatever the solution, I think we've got some tough sledding ahead of us.
>
> Brad
>
> On Mon, Sep 22, 2008 at 9:41 PM, Herb Parsons <hparsons at parsonsys.com> wrote:
>> Brad,
>>
>> Clinton Administration?
>>
>> Did that article say "under increasing pressure from the Clinton
>> Administration to expand mortgage loans among low and moderate income
>> people"
>>
>> That's got to be bogus. This mess was caused by the Republicans dammit,
>> all those kool-aid drinkers couldn't possibly be wrong...
>>
>> Since we're blowing away a little smoke from the "let's blame the
>> Republicans" kool-aid fans, fast-forward from 1999 to 2005, and take a
>> look at the Federal Housing Enterprise Regulatory Reform Act of 2005.
>>
>> In part, here's what Charles Hagel had to say about it: "Our legislation
>> would create a new independent world class regulator for Fannie Mae,
>> Freddie Mac and the Federal Home Loan Banks. Our bill provides the new
>> regulator with enhanced regulatory flexibility and enforcement tools
>> like those afforded to the Federal Deposit Insurance Corporation, the
>> Federal Reserve System, the Office of the Comptroller of the Currency
>> and the Office of Thrift Supervision. "
>>
>> Here's what McCain (a co-sponsor) had to say about it: "For years I have
>> been concerned about the regulatory structure that governs Fannie Mae
>> and Freddie Mac--known as Government-sponsored entities or GSEs--and the
>> sheer magnitude of these companies and the role they play in the housing
>> market. OFHEO's report this week does nothing to ease these concerns. In
>> fact, the report does quite the contrary. OFHEO's report solidifies my
>> view that the GSEs need to be reformed without delay."
>>
>> Would have been nice, huh?
>>
>> Unfortunately, the bill never made it out of committee. Chris Dodd was
>> on the committee at the time, and is now chairs it. He's the all time
>> highest receiver of money from the Fannie-Freddie lobbies. It's worth
>> noting that Obama is #2 in receiving those lobby monies.
>>
>> But, ignore all that. Pelosi says it's all the Republican's fault. Would
>> that be cherry, or grape kool-aid?
>>
>> Hey politics fans, see if you folks can guess who said this back in 2005
>> - "If Congress does not act, American taxpayers will continue to be
>> exposed to the enormous risk that Fannie Mae and Freddie mac pose to the
>> housing market, the overall financial market, and the economy as a whole."
>>
>>
>>
>> Brad Haslett wrote:
>>> Mike,
>>>
>>> Here's a New York Time's article from 1999 that may shed some light on
>>> how this mess got started.
>>>
>>> Brad
>>>
>>> --------------------------
>>> http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&scp=1&sq=september%201999%20fannie%20mae&st=cse
>>>
>>> September 30, 1999
>>> Fannie Mae Eases Credit To Aid Mortgage Lending
>>> By STEVEN A. HOLMES
>>>
>>> In a move that could help increase home ownership rates among
>>> minorities and low-income consumers, the Fannie Mae Corporation is
>>> easing the credit requirements on loans that it will purchase from
>>> banks and other lenders.
>>>
>>> The action, which will begin as a pilot program involving 24 banks in
>>> 15 markets -- including the New York metropolitan region -- will
>>> encourage those banks to extend home mortgages to individuals whose
>>> credit is generally not good enough to qualify for conventional loans.
>>> Fannie Mae officials say they hope to make it a nationwide program by
>>> next spring.
>>>
>>> Fannie Mae, the nation's biggest underwriter of home mortgages, has
>>> been under increasing pressure from the Clinton Administration to
>>> expand mortgage loans among low and moderate income people and felt
>>> pressure from stock holders to maintain its phenomenal growth in
>>> profits.
>>>
>>> In addition, banks, thrift institutions and mortgage companies have
>>> been pressing Fannie Mae to help them make more loans to so-called
>>> subprime borrowers. These borrowers whose incomes, credit ratings and
>>> savings are not good enough to qualify for conventional loans, can
>>> only get loans from finance companies that charge much higher interest
>>> rates -- anywhere from three to four percentage points higher than
>>> conventional loans.
>>>
>>> ''Fannie Mae has expanded home ownership for millions of families in
>>> the 1990's by reducing down payment requirements,'' said Franklin D.
>>> Raines, Fannie Mae's chairman and chief executive officer. ''Yet there
>>> remain too many borrowers whose credit is just a notch below what our
>>> underwriting has required who have been relegated to paying
>>> significantly higher mortgage rates in the so-called subprime
>>> market.''
>>>
>>> Demographic information on these borrowers is sketchy. But at least
>>> one study indicates that 18 percent of the loans in the subprime
>>> market went to black borrowers, compared to 5 per cent of loans in the
>>> conventional loan market.
>>>
>>> In moving, even tentatively, into this new area of lending, Fannie Mae
>>> is taking on significantly more risk, which may not pose any
>>> difficulties during flush economic times. But the
>>> government-subsidized corporation may run into trouble in an economic
>>> downturn, prompting a government rescue similar to that of the savings
>>> and loan industry in the 1980's.
>>>
>>> ''From the perspective of many people, including me, this is another
>>> thrift industry growing up around us,'' said Peter Wallison a resident
>>> fellow at the American Enterprise Institute. ''If they fail, the
>>> government will have to step up and bail them out the way it stepped
>>> up and bailed out the thrift industry.''
>>>
>>> Under Fannie Mae's pilot program, consumers who qualify can secure a
>>> mortgage with an interest rate one percentage point above that of a
>>> conventional, 30-year fixed rate mortgage of less than $240,000 -- a
>>> rate that currently averages about 7.76 per cent. If the borrower
>>> makes his or her monthly payments on time for two years, the one
>>> percentage point premium is dropped.
>>>
>>> Fannie Mae, the nation's biggest underwriter of home mortgages, does
>>> not lend money directly to consumers. Instead, it purchases loans that
>>> banks make on what is called the secondary market. By expanding the
>>> type of loans that it will buy, Fannie Mae is hoping to spur banks to
>>> make more loans to people with less-than-stellar credit ratings.
>>>
>>> Fannie Mae officials stress that the new mortgages will be extended to
>>> all potential borrowers who can qualify for a mortgage. But they add
>>> that the move is intended in part to increase the number of minority
>>> and low income home owners who tend to have worse credit ratings than
>>> non-Hispanic whites.
>>>
>>> Home ownership has, in fact, exploded among minorities during the
>>> economic boom of the 1990's. The number of mortgages extended to
>>> Hispanic applicants jumped by 87.2 per cent from 1993 to 1998,
>>> according to Harvard University's Joint Center for Housing Studies.
>>> During that same period the number of African Americans who got
>>> mortgages to buy a home increased by 71.9 per cent and the number of
>>> Asian Americans by 46.3 per cent.
>>>
>>> In contrast, the number of non-Hispanic whites who received loans for
>>> homes increased by 31.2 per cent.
>>>
>>> Despite these gains, home ownership rates for minorities continue to
>>> lag behind non-Hispanic whites, in part because blacks and Hispanics
>>> in particular tend to have on average worse credit ratings.
>>>
>>> In July, the Department of Housing and Urban Development proposed that
>>> by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's
>>> portfolio be made up of loans to low and moderate-income borrowers.
>>> Last year, 44 percent of the loans Fannie Mae purchased were from
>>> these groups.
>>>
>>> The change in policy also comes at the same time that HUD is
>>> investigating allegations of racial discrimination in the automated
>>> underwriting systems used by Fannie Mae and Freddie Mac to determine
>>> the credit-worthiness of credit applicants.
>>>
>>>
>>>
>>>
>>> On Mon, Sep 22, 2008 at 9:05 AM, Michael D. Weisner <mweisner at ebsmed.com> wrote:
>>>
>>>> Brad,
>>>>
>>>> Thanks for the story.  It was well written and very interesting.  Haslett on
>>>> Hassett.
>>>>
>>>> If you are interested in viewing the original S.190 bill, you may find it
>>>> at:
>>>> http://www.govtrack.us/congress/bill.xpd?bill=s109-190
>>>>
>>>> Sponsor:
>>>> Sen. Charles Hagel [R-NE]
>>>>
>>>> Cosponsors [as of 2007-01-08]
>>>> Sen. Elizabeth Dole [R-NC]
>>>> Sen. John McCain [R-AZ]
>>>> Sen. John Sununu [R-NH]
>>>>
>>>> If you're a purist and do not want the commentary and analysis, you may find
>>>> the text at the LoC:
>>>> http://thomas.loc.gov/cgi-bin/query/C?c109:./temp/~c109wHZu09
>>>>
>>>> Mike
>>>> s/v Shanghaid'd Summer ('81)
>>>>       Nissequogue River, NY
>>>>
>>>> From: "Brad Haslett" <flybrad at gmail.com>Sent: Monday, September 22, 2008
>>>> 9:09 AM
>>>>
>>>>> Ed,
>>>>>
>>>>> Thanks, I still don't have a good grip on all these debt swap and
>>>>> derivative contracts but then neither did Warren Buffet. Anyway you
>>>>> slice it, Fannie and Freddie were what brought this house of cards
>>>>> down (see attached).
>>>>>
>>>>> Brad
>>>>>
>>>>> -----------------------------
>>>>>
>>>>>
>>>>>
>>>>> Commentary by Kevin Hassett
>>>>> More Photos/Details
>>>>>
>>>>> Sept. 22 (Bloomberg) -- The financial crisis of the past year has
>>>>> provided a number of surprising twists and turns, and from Bear
>>>>> Stearns Cos. to American International Group Inc., ambiguity has been
>>>>> a big part of the story.
>>>>>
>>>>> Why did Bear Stearns fail, and how does that relate to AIG? It all
>>>>> seems so complex.
>>>>>
>>>>> But really, it isn't. Enough cards on this table have been turned over
>>>>> that the story is now clear. The economic history books will describe
>>>>> this episode in simple and understandable terms: Fannie Mae and
>>>>> Freddie Mac exploded, and many bystanders were injured in the blast,
>>>>> some fatally.
>>>>>
>>>>> Fannie and Freddie did this by becoming a key enabler of the mortgage
>>>>> crisis. They fueled Wall Street's efforts to securitize subprime loans
>>>>> by becoming the primary customer of all AAA-rated subprime-mortgage
>>>>> pools. In addition, they held an enormous portfolio of mortgages
>>>>> themselves.
>>>>>
>>>>> In the times that Fannie and Freddie couldn't make the market, they
>>>>> became the market. Over the years, it added up to an enormous
>>>>> obligation. As of last June, Fannie alone owned or guaranteed more
>>>>> than $388 billion in high-risk mortgage investments. Their large
>>>>> presence created an environment within which even mortgage-backed
>>>>> securities assembled by others could find a ready home.
>>>>>
>>>>> The problem was that the trillions of dollars in play were only
>>>>> low-risk investments if real estate prices continued to rise. Once
>>>>> they began to fall, the entire house of cards came down with them.
>>>>>
>>>>> Turning Point
>>>>>
>>>>> Take away Fannie and Freddie, or regulate them more wisely, and it's
>>>>> hard to imagine how these highly liquid markets would ever have
>>>>> emerged. This whole mess would never have happened.
>>>>>
>>>>> It is easy to identify the historical turning point that marked the
>>>>> beginning of the end.
>>>>>
>>>>> Back in 2005, Fannie and Freddie were, after years of dominating
>>>>> Washington, on the ropes. They were enmeshed in accounting scandals
>>>>> that led to turnover at the top. At one telling moment in late 2004,
>>>>> captured in an article by my American Enterprise Institute colleague
>>>>> Peter Wallison, the Securities and Exchange Comiission's chief
>>>>> accountant told disgraced Fannie Mae chief Franklin Raines that
>>>>> Fannie's position on the relevant accounting issue was not even ``on
>>>>> the page'' of allowable interpretations.
>>>>>
>>>>> Then legislative momentum emerged for an attempt to create a
>>>>> ``world-class regulator'' that would oversee the pair more like banks,
>>>>> imposing strict requirements on their ability to take excessive risks.
>>>>> Politicians who previously had associated themselves proudly with the
>>>>> two accounting miscreants were less eager to be associated with them.
>>>>> The time was ripe.
>>>>>
>>>>> Greenspan's Warning
>>>>>
>>>>> The clear gravity of the situation pushed the legislation forward.
>>>>> Some might say the current mess couldn't be foreseen, yet in 2005 Alan
>>>>> Greenspan told Congress how urgent it was for it to act in the
>>>>> clearest possible terms: If Fannie and Freddie ``continue to grow,
>>>>> continue to have the low capital that they have, continue to engage in
>>>>> the dynamic hedging of their portfolios, which they need to do for
>>>>> interest rate risk aversion, they potentially create ever-growing
>>>>> potential systemic risk down the road,'' he said. ``We are placing the
>>>>> total financial system of the future at a substantial risk.''
>>>>>
>>>>> What happened next was extraordinary. For the first time in history, a
>>>>> serious Fannie and Freddie reform bill was passed by the Senate
>>>>> Banking Committee. The bill gave a regulator power to crack down, and
>>>>> would have required the companies to eliminate their investments in
>>>>> risky assets.
>>>>>
>>>>> Different World
>>>>>
>>>>> If that bill had become law, then the world today would be different.
>>>>> In 2005, 2006 and 2007, a blizzard of terrible mortgage paper
>>>>> fluttered out of the Fannie and Freddie clouds, burying many of our
>>>>> oldest and most venerable institutions. Without their checkbooks
>>>>> keeping the market liquid and buying up excess supply, the market
>>>>> would likely have not existed.
>>>>>
>>>>> But the bill didn't become law, for a simple reason: Democrats opposed
>>>>> it on a party-line vote in the committee, signaling that this would be
>>>>> a partisan issue. Republicans, tied in knots by the tight Democratic
>>>>> opposition, couldn't even get the Senate to vote on the matter.
>>>>>
>>>>> That such a reckless political stand could have been taken by the
>>>>> Democrats was obscene even then. Wallison wrote at the time: ``It is a
>>>>> classic case of socializing the risk while privatizing the profit. The
>>>>> Democrats and the few Republicans who oppose portfolio limitations
>>>>> could not possibly do so if their constituents understood what they
>>>>> were doing.''
>>>>>
>>>>> Mounds of Materials
>>>>>
>>>>> Now that the collapse has occurred, the roadblock built by Senate
>>>>> Democrats in 2005 is unforgivable. Many who opposed the bill
>>>>> doubtlessly did so for honorable reasons. Fannie and Freddie provided
>>>>> mounds of materials defending their practices. Perhaps some found
>>>>> their propaganda convincing.
>>>>>
>>>>> But we now know that many of the senators who protected Fannie and
>>>>> Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd,
>>>>> have received mind-boggling levels of financial support from them over
>>>>> the years.
>>>>>
>>>>> Throughout his political career, Obama has gotten more than $125,000
>>>>> in campaign contributions from employees and political action
>>>>> committees of Fannie Mae and Freddie Mac, second only to Dodd, the
>>>>> Senate Banking Committee chairman, who received more than $165,000.
>>>>>
>>>>> Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and
>>>>> employee contributions, has received more than $75,000 from the two
>>>>> enterprises and their employees. The private profit found its way back
>>>>> to the senators who killed the fix.
>>>>>
>>>>> There has been a lot of talk about who is to blame for this crisis. A
>>>>> look back at the story of 2005 makes the answer pretty clear.
>>>>>
>>>>> Oh, and there is one little footnote to the story that's worth keeping
>>>>> in mind while Democrats point fingers between now and Nov. 4: Senator
>>>>> John McCain was one of the three cosponsors of S.190, the bill that
>>>>> would have averted this mess.
>>>>>
>>>>> (Kevin Hassett, director of economic-policy studies at the American
>>>>> Enterprise Institute, is a Bloomberg News columnist.
>>>>>
>>>>>
>>>>> Last Updated: September 22, 2008 00:04 EDT
>>>>>
>>>>>
>>>>>
>>>>> On Sun, Sep 21, 2008 at 6:53 PM, Tootle <ekroposki at charter.net> wrote:
>>>>>
>>>>>> Brad,
>>>>>>
>>>>>> Have you seen this site?
>>>>>>
>>>>>> http://www.occ.treas.gov/ftp/deriv/dq403.pdf
>>>>>>
>>>>>> Ed K
>>>>>> Greenville, SC, USA
>>>>>> http://www.nabble.com/file/p19599807/stock%2Btip.gif stock+tip.gif
>>>>>>
>>>>>>
>>>>>>
>>>>>> Ed, Brad,
>>>>>>
>>>>>> First, thanks Brad for taking the time to post all this stuff.
>>>>>>
>>>>>> Next, Ed, while I agree with most of what you have said I gotta' take
>>>>>> this with a grain of salt
>>>>>>
>>>>>>
>>>>>>> and 2.
>>>>>>> the people who were reporters, editors or commentators did not have
>>>>>>> appropirate education to understand what they reported or chose not
>>>>>>> report
>>>>>>> the issues. [This goes back to my comments to Captain Rummy]
>>>>>>>
>>>>>> Appropriate education is way over-rated. I have none to speak of and I
>>>>>> have been watching incredulously as this whole thing unfolded. I think
>>>>>> all this proves is that some of the most prestigious colleges in the
>>>>>> country graduate some of the least sensible people. It doesn't take a
>>>>>> rocket scientist to figure out that you can't loan money to people who
>>>>>> aren't going to pay it back and remain in business for long. You can't
>>>>>> continually make risky loans and expect to be able to pass the risk on
>>>>>> to some greater fool forever. Eventually even the dimmest bulb is going
>>>>>> to figure out he's being taken for a ride.
>>>>>>
>>>>>> So, lets not try to claim that more education would have helped these
>>>>>> fools. What was and is obvious to a high school graduate should have
>>>>>> been child's play for someone with "higher education" yet, they show us
>>>>>> a complete lack of common sense. It seems you can't get good sense
>>>>>> through education.
>>>>>>
>>>>>> Rik
>>>>>>
>>>>>> Ayn Rand was a prophet - - it isn't my fault
>>>>>>
>>>>>>
>>>>>>
>>>>>> Tootle wrote:
>>>>>>
>>>>>>> Brad,
>>>>>>>
>>>>>>> 1.  Thank you for your posts on this subject.  There are those who
>>>>>>> quibble
>>>>>>> that this series of posts is not sailing related.  Well it is.  Because
>>>>>>> it
>>>>>>> concerns our freedom to sail, buy a boat, keep a small sail boat maker
>>>>>>> in
>>>>>>> business.  It is important to understand the basics of business,
>>>>>>> economics
>>>>>>> and ethics.
>>>>>>>
>>>>>>> 2.  Warren Buffet was not the only one who understood the problems with
>>>>>>> the
>>>>>>> mortagages, loans and financial instuments involved.  The important
>>>>>>> thing
>>>>>>> to
>>>>>>> comprehend is 'The holy media' did not understand.  Why?  Two important
>>>>>>> reasons:  1.  It flies in the face of liberalism and their advocacy, and
>>>>>>> 2.
>>>>>>> the people who were reporters, editors or commentators did not have
>>>>>>> appropirate education to understand what they reported or chose not
>>>>>>> report
>>>>>>> the issues. [This goes back to my comments to Captain Rummy]
>>>>>>>
>>>>>>> I am sure the lady accountant who broke the Enron scandal understands
>>>>>>> what
>>>>>>> the financial and accounting issues are.
>>>>>>>
>>>>>>> I am sure that those who support 'Progressivism' do not care to
>>>>>>> understand
>>>>>>> the real results of their advocacy.  Thank you for pointing out Obama's
>>>>>>> financial advisors use of the problem causing techniques.
>>>>>>>
>>>>>>> Again, thank you for the information.
>>>>>>>
>>>>>>> Ed K
>>>>>>> Greenville, SC, USA
>>>>>>> Addenda:
>>>>>>>
>>>>>>> 1.  "Character isn't something you were born with and can't change, like
>>>>>>> your fingerprints. It's something you weren't born with and must take
>>>>>>> responsibility for forming."  Jim Rohn
>>>>>>>
>>>>>>> 2.  "Leaders are made, they are not born. They are made by hard effort,
>>>>>>> which is the price which all of us must pay to achieve any goal that is
>>>>>>> worthwhile."  Vince Lombardi
>>>>>>>
>>>>>>> 3.  "Most of the poverty and misery in the world is due to bad
>>>>>>> government,
>>>>>>> lack of democracy, weak states, internal strife, and so on."  George
>>>>>>> Soros
>>>>>>>
>>>>>>>
>>>>>>> Brad Haslett-2 wrote:
>>>>>>>
>>>>>>>
>>>>>>>> Ed,
>>>>>>>>
>>>>>>>> It will take years to unravel this whole puzzle and no doubt a lot of
>>>>>>>> money will be made writing books about it, but here's what we know for
>>>>>>>> now.  The economy was about to grind to a stop like an engine running
>>>>>>>> without oil, ie, financial institutions were about to stop lending
>>>>>>>> money because no one trusted anyone.  The root cause was a lot of
>>>>>>>> really nasty mortgages made with horrendous lending practices. Add in
>>>>>>>> some new debt instruments that no one really understood (Mr. Buffet
>>>>>>>> excepted) and the problems accelerated. The "fix", if you want to call
>>>>>>>> it that, is for the federal government to allow financial institutions
>>>>>>>> to dump their toxic assets, clean up their books, and go back to "mark
>>>>>>>> to market" accounting with assets of determinable value.  What this
>>>>>>>> will cost the government is unknown because the value of the assets to
>>>>>>>> be dumped is unknown.  Just like the RFC during the Great Depression
>>>>>>>> and the Resolution Trust in the late 80's, some of these assets do
>>>>>>>> have value and the taxpayer will get some of their money back.  One of
>>>>>>>> ideas being floated now is a reverse auction where institution bids
>>>>>>>> down to a price that they are willing to sell the government the bad
>>>>>>>> assets. This is truly new territory. Lehman Brothers had a chance to
>>>>>>>> be acquired by Bank of Korea and CITIC bank of China months ago but
>>>>>>>> thought they could get a better price.  Now they'll settle for pennies
>>>>>>>> on the dollar.
>>>>>>>>
>>>>>>>> Ever heard of a NINJA loan?  Neither had I until a couple of years ago
>>>>>>>> and it didn't make sense then and it sure as hell doesn't now.  NINJA
>>>>>>>> - no income, no job or assets.  Who in their right mind would make
>>>>>>>> such a loan?  No one, unless they thought they could palm the risk off
>>>>>>>> on someone else.  Fanny and Freddie are the biggest culprits in this
>>>>>>>> mess.  Now here's where it gets interesting. They and most banks
>>>>>>>> operated using sound lending practices until the late 70's when the
>>>>>>>> Community Reinvestment Act was passed by Carter. (I'm going to use a
>>>>>>>> "cheap and easy" citation here instead of financial news articles to
>>>>>>>> save time)
>>>>>>>>
>>>>>>>> http://en.wikipedia.org/wiki/Community_Reinvestment_Act
>>>>>>>>
>>>>>>>> Clinton strengthened the act in 1995 and shoved more bad lending
>>>>>>>> practices down bankers throats. One of the "leaders" in subprime
>>>>>>>> mortgages was Superior Bank in Chicago.
>>>>>>>>
>>>>>>>> http://query.nytimes.com/gst/fullpage.html?res=9C05E4D71E3CF934A3575BC0A9679C8B63&sec=&spon=&pagewanted=1
>>>>>>>>
>>>>>>>> Superior went belly-up in 2001.  Who ran Superior?  Penny Pritzker, B
>>>>>>>> Hussein Obama's finance 2008 finance chairman, financial sponsor, and
>>>>>>>> also chairman of the successor to the Chicago Annenberg Challenge. The
>>>>>>>> point is, the demo model for subprimes was Superior and it failed.
>>>>>>>> Pritzker was to the sub prime mortgage what Michal Malkin was to junk
>>>>>>>> bonds.
>>>>>>>>
>>>>>>>> In 2003 the Bush administration tried to reform Freddie and Fannie and
>>>>>>>> was shot down, led by Barny Frank.
>>>>>>>>
>>>>>>>> http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63
>>>>>>>>
>>>>>>>> Some Senators saw the handwriting on the wall in 2005 and again tried
>>>>>>>> to reform Fan & Fred.
>>>>>>>>
>>>>>>>> http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190#sMonofilemx003Ammx002Fmmx002Fmmx002Fmhomemx002Fmgovtrackmx002Fmdatamx002Fmusmx002Fm109mx002Fmcrmx002Fms20060525-16.xmlElementm0m0m0m
>>>>>>>>
>>>>>>>> By 2007, the problems were too big too ignore because so many
>>>>>>>> homeowners were defaulting.  The financial markets stayed intact
>>>>>>>> because these "toxic mortgages" were hidden behind some really clever
>>>>>>>> debt instruments.  Then everyone got scared.
>>>>>>>>
>>>>>>>> I'll post more as information trickles in.  Both political parties
>>>>>>>> have their fingerprints all over this mess and Wall Street threw some
>>>>>>>> good old fashioned GREED into mix for the final meltdown.  Follow the
>>>>>>>> money-
>>>>>>>>
>>>>>>>> http://www.opensecrets.org/industries/mems.php
>>>>>>>>
>>>>>>>> What interesting times we live in!
>>>>>>>>
>>>>>>>> Brad
>>>>>>>>
>>>>>>>>
>>>>>>>>
>>>>>>>> On Sun, Sep 21, 2008 at 6:16 AM, Tootle <ekroposki at charter.net> wrote:
>>>>>>>>
>>>>>>>>
>>>>>>>>> Brad,
>>>>>>>>>
>>>>>>>>> You are the accountant on this forum.  If there are others, they do
>>>>>>>>> not
>>>>>>>>> have
>>>>>>>>> courage so speak up.
>>>>>>>>>
>>>>>>>>> This is also an ethical question, a legal ethical question.  And
>>>>>>>>> lawyers
>>>>>>>>> should be speaking up.  But alas, they claim Marxism is good.  Or they
>>>>>>>>> say
>>>>>>>>> their practice is limited to real estate transactions or business
>>>>>>>>> matters.
>>>>>>>>> What the hell caused this mess?
>>>>>>>>>
>>>>>>>>> In South Carolina when the state legislature is not in session, lawyer
>>>>>>>>> represenatives represent clients before judges they elect.  Right and
>>>>>>>>> Wrong,
>>>>>>>>> good and evil, when working in a gray areas, it is important that
>>>>>>>>> actions
>>>>>>>>> withstand the scrutiny of sunlight.
>>>>>>>>>
>>>>>>>>> Brad said, "Here's something you don't hear much about - I've read
>>>>>>>>> exactly
>>>>>>>>> two articles that discussed "mark to market" including one from Steve
>>>>>>>>> Forbes.  He didn't name it but he's referring to FASB 157 (Financial
>>>>>>>>> Accounting Standards Board) which went into effect November 15, 2008
>>>>>>>>> that
>>>>>>>>> requires all assets including level 3 assets which include
>>>>>>>>> collateralized
>>>>>>>>> debt obligations (what Warren Buffet described as "weapons of mass
>>>>>>>>> financial
>>>>>>>>> destruction" in 2002) to be shown on the books at market value.  There
>>>>>>>>> lies
>>>>>>>>> the problem, no one knows what these obligations are "worth" and when
>>>>>>>>> faith
>>>>>>>>> in these instruments failed, the system started grinding to a halt.
>>>>>>>>>
>>>>>>>>> If the people had been honest and ethical from the get go they would
>>>>>>>>> have
>>>>>>>>> held the actions and the paper they were written on to sunlight and a
>>>>>>>>> simple
>>>>>>>>> test of right and wrong.  These events remind me of the lady who
>>>>>>>>> spilled
>>>>>>>>> the
>>>>>>>>> beans in the Enron situation.  And the media said Enron was big?
>>>>>>>>>
>>>>>>>>> As you find time tell us where to find Steve's article and Warrens
>>>>>>>>> admonition.  And post any relevant sources.
>>>>>>>>>
>>>>>>>>> Yes, Marxism is at issue because of the Federal requirement of banks
>>>>>>>>> to
>>>>>>>>> loan
>>>>>>>>> in questionable situations instead of holding federally backed loans
>>>>>>>>> to
>>>>>>>>> a
>>>>>>>>> high standard.  The government compelled bankers to disregard risks.
>>>>>>>>> Dictatorship, Marxism, Socialism, Progressivism, call it what you
>>>>>>>>> want,
>>>>>>>>> it
>>>>>>>>> is wrong and leads to garbage.
>>>>>>>>>
>>>>>>>>> Ed K
>>>>>>>>> Greenville, SC, USA
>>>>>>>>> attachment:
>>>>>>>>> http://www.nabble.com/file/p19593492/401k.jpg 401k.jpg
>>>>>>>>>
>>>>>>>>>
>>>>>>>>> Ed,
>>>>>>>>> The subject line should probably be edited to include 'Politics' since
>>>>>>>>> that is always an aspect of economics, but let's stick primarily to
>>>>>>>>> economics for now.
>>>>>>>>>
>>>>>>>>> First, a quick personal note.  My union called me this week - the wife
>>>>>>>>> of one of our members is dying from cancer and he has burned through
>>>>>>>>> his sick leave to be by her side.  They asked me to cover one of his
>>>>>>>>> trips last night, which I did.  I contacted my superior in the
>>>>>>>>> training department and asked that he get the word out to fellow
>>>>>>>>> instructors to consider flying "back-side-of-the-clock" trips for
>>>>>>>>> landing currency instead of the usual afternoon "gentlemen" trips, and
>>>>>>>>> they have stepped-up to the plate.  This is a great country, and I am
>>>>>>>>> fortunate to work for a wonderful company and with a very professional
>>>>>>>>> union.
>>>>>>>>>
>>>>>>>>> Now about this little "financial problem" we face, it is bad. Just as
>>>>>>>>> in every major airline crash that leaves a smoking hole in the ground,
>>>>>>>>> the press immediately jumps to conclusions, focuses on the horror, and
>>>>>>>>> is usually wrong in their analysis. What we are witnessing here is not
>>>>>>>>> a crash (despite the MSM comparisons to 1929) but more like a GPWS
>>>>>>>>> (ground proximity warning system) encounter - if immediate action
>>>>>>>>> isn't taken, disaster will be the result. Like every aircraft
>>>>>>>>> accident, the usual suspects start their spin, "It was the pilots
>>>>>>>>> fault", "It was Boeings fault", "It was the company's fault", "It was
>>>>>>>>> the weather".  The reality takes years to discover and the root causes
>>>>>>>>> are often something completely different than the original pundits
>>>>>>>>> analysis. And most importantly, there is usually plenty of blame and
>>>>>>>>> responsibility to go around.
>>>>>>>>>
>>>>>>>>> Here's the quick and dirty on what we know.  The financial markets
>>>>>>>>> were about to shut down because the trust and faith in the underlying
>>>>>>>>> assets that props-up the entire system were suspect.
>>>>>>>>>
>>>>>>>>> I'll go into a more thorough analysis tomorrow after a good nights
>>>>>>>>> sleep.  Here's something you don't hear much about - I've read exactly
>>>>>>>>> two articles that discussed "mark to market" including one from Steve
>>>>>>>>> Forbes.  He didn't name it but he's referring to FASB 157 (Financial
>>>>>>>>> Accounting Standards Board) which went into effect November 15, 2008
>>>>>>>>> that requires all assets including level 3 assets which include
>>>>>>>>> collateralized debt obligations (what Warren Buffet described as
>>>>>>>>> "weapons of mass financial destruction" in 2002) to be shown on the
>>>>>>>>> books at market value.  There lies the problem, no one knows what
>>>>>>>>> these obligations are "worth" and when faith in these instruments
>>>>>>>>> failed, the system started grinding to a halt.
>>>>>>>>>
>>>>>>>>> I'm not very happy about the federal government nationalizing roughly
>>>>>>>>> 7% of the economy but let's hope this only a temporary jolt of
>>>>>>>>> medicine and the government will divest themselves of their new
>>>>>>>>> "ownership" position as quickly as they acquired it.
>>>>>>>>>
>>>>>>>>> We'll discuss the culprits tomorrow.
>>>>>>>>>
>>>>>>>>> Brad
>>>>>>>>>
>>>>>>>>> On Fri, Sep 19, 2008 at 6:26 PM, Tootle <ekroposki at charter.net> wrote:
>>>>>>>>>
>>>>>>>>>
>>>>>>>>>> Brad just posted a significant post to the list, but its significance
>>>>>>>>>> gets
>>>>>>>>>> lost in subject line.  All shoud read his last post:
>>>>>>>>>>
>>>>>>>>>> http://www.rhodes22.org/pipermail/rhodes22-list/2008-September/054616.html
>>>>>>>>>>
>>>>>>>>>> I am referring to the briefing to Congress.
>>>>>>>>>>
>>>>>>>>>> Ed K
>>>>>>>>>> Greenville, SC, USA
>>>>>>>>>>
>>>>>> http://www.nabble.com/file/p19599807/stock%2Btip.gif stock+tip.gif
>>>>>> --
>>>>>> View this message in context:
>>>>>> http://www.nabble.com/Economics---Significant-Post-to-List-with-wrong-subject-line%21%21%21-tp19590875p19599807.html
>>>>>> Sent from the Rhodes 22 mailing list archive at Nabble.com.
>>>>>>
>>>>>> __________________________________________________
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>>>>>>
>>>>>>
>>>>> __________________________________________________
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>>>>>
>>>>>
>>>>>
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