Kroszner: "It's not the CRA."

"we found essentially no difference in the performance of subprime loans in Zip codes that were just below or just above the income threshold for the CRA."

I've seen quite a bit of writing in the blogosphere, pointing to the Community Reinvestment Act (CRA) as the, if not one of the, causes of our current financial crisis. Ridiculous as it may seem, some are very adamant about the impacts of the CRA. Fed Govenor Randall Kroszner, today, spoke on the results of a study by the fed to investigate those allegations.

The findings clearly show that the CRA could not have had a significant impact.

"First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken..."

Given the stories about lenders giving loans to whom ever they could without regard to standards, affirmed in my personal experience in mortgage origination, it's hard to see how anyone could blame a program like the CRA as been the root of the problem.

Our nation has been experiencing an economic decline since some time in 2002. We've shipped many of our jobs over seas to locations with lower, if non existent, labor and environmental quality practices. An expansion of credit made possible through accelerated regulatory liberalization in our financial industry masked a decline. We've now reached a point where the benefits of industry and production are exceeded by the levels of debt we've incurred.

This strong debt contraction is a necessary reaction to correct potentially 30 years of financial abuse. The idea that bailing out lending institutions so they can continue lending in the face of an already over leveraged economy makes little or no sense.

Given this idea, that we are facing the consequences of over-leveraging (or that we're just bankrupt) it seems impossible to point to something the size of the CRA, especially in light of the comparison of CRA eligible loans in default to non CRA loans, as the source of our current financial troubles.

[Kroszner's Speech]

Trouble Ahead; Not Enough Cash To Cover...

Consider the following:

• The Dow Jones is now down 40% from it's peak. In the last 7 trading days it's dropped 20%.
• Those declines will mean a significant drop in tax revenues as tax revenue will not the same as it was during years of market growth when market players took profits. Their losses will now be written off for years to come. That tax revenue will not be there for some time.
  
• While trillions in investments have been lost, many soon to be retired Baby Boomers have lost money from their retirement accounts.
• With anticipation of greater and greater job lay-offs the tax roles will be further depleted by the lack of payee's into the payroll tax system will mean great deficits in the social security system.
• Great declines in housing markets are shrinking tax revenues for states and local governments throughout the country.
• We've committed over a trillion dollars so far to a bailout into failed tactics that will lead to greater losses, and further depletion of government accounts.
• The FDIC does not have enough money to cover the bank defaults to come, and will need to be recapitalized.
• Were currently devoting trillions of dollars to fight wars in Afghanistan and Iraq.

Mortgage Failures are a Symptom, not the Disease.

In numerous places now, most notably the president's speech on behalf of his bank bailout, mortgage failures are being used as the scapegoat for a declining economy.

This is, the way I see it, at very incorrect and dangerous assumption. Mortgage failures are an indicator that something is not well in the system. The resulting impacts of the failures point to the heart of the issue.

Institutions that have been funding the debt have levered themselves to the point that they could not even withstand modest losses. And further more, not unlike some addicts, some of the financial institutions on Wall Street could not sustain any longer if they could not produce more and more mortgages.

Wall Street's financial institutions have over leveraged themselves. This country has over leveraged itself. Investment needs to be made into non-financial productive work.

These mortgage failures are indicators, margin calls. And instead of settling our debts, we're creating a $700 billion dollar bailout that threatens to continue the problem.

UPDATE: Finally here's an article on just this subject from the Financial Times via Naket Captialsim.

Letter to My Congressman. NO Bailouts

Congressman Inslee,

I'm writing you today on an issue that I feel is a part of a defining moment in this country's history.

There are massive shifts occurring in credit markets right now and those shifts are going to have a significant impact on our ways of life.

The Administration via Secretary Paulson has submitted a ridiculous bailout legislation plan that it appears many in congress are taking seriously. Senator Dodd has even crafted legislation that, while significantly cleaning up Paulson's proposal, still follows in lock step.

I've heard members of congress in hearings talking about how it's up to the administration to explain why this bailout is necessary, as if the throngs of angry constituents don't understand.

I want you to know, Congressman, that I do understand. I understand and I am angry. I am angry as I was when we launched the Iraq war, when we passed the patriot act, and when I saw that FEMA had almost no plan or competence to handle the aftermath of Hurricane Katrina.

I understand that our economy is in deep trouble. That a massive deleveraging event is taking place. I understand that this means we will be facing a lot of hardship in the years to come.

But I also can see that there is nothing that can, or should be done about his deleveraging, other than to take measures to make it orderly and to work to support our fellow citizens when the time comes.

Paulson's plan is flawed in so many despicable and obvious ways. But in one core way it is flawed that should stand out.

The plan is guilty of trying to keep "the debt party" going, when there is no reasonable cause to assume that it should.

The debt bubble has eroded much of our economy. While we enjoyed the temporary benefits of massive leverage much of our industry was displaced through movements to other labor markets. We've been lax in exploring new technologies in energy production, and energy efficiency. But it is that very sort of productivity that we find ourselves desperately in need of now.

We are in trouble, and there is a way to deal with the trouble that helps us begin growing new and better institutions that can help us rise out of this decline. But the bailout proposal is not only thievery and economic terrorism on the Administration's part, it is also a denial on the part of others who would like to keep us in the dysfunctional state we've been in.

Congressman, I don't think I'm the only constituent who understands.

Please filibuster any bailout proposal.

Thank you,

Caleb Mardini

contact your senator now.

contact your representative now.

Not a Dime! Stop the Bailout

There is currently a horrifying proposal being fast tracked through congress by the President and Treasury Secretary Henry Paulson. Many members of congress have openly admitted they don't understand the situation and they aren't sure what to do.

I've called my senators offices and I was asked to organize people in a calling campaign. They want to hear what we have to say.

What's happening right now in our financial markets is a major event, regardless of what the government does, I feel it's going to have a major impact on us all. However I believe the proposal being fast tracked threatens to make things much, much worse.

I ask that you read the proposal yourself. It is very short. You can also read the analysis I've posted here.

The chances of preventing this are very limited . But after reading the proposal, please call and email your senator, NOT JUST ONCE, BUT A COUPLE OF TIMES A DAY, for all of this week.

Ask them to block or filibuster any bailout legislation.
Ask them to vote no.
Tell them you don't want to pay for a bailout.

Here's a link to the text of the plan.
Click here for contact information for the Senate.

• The Foxes are in the henhouse.
  Prior to becoming the treasury secretary in 2006 Henry Paulson ran Goldman Sachs bringing the company to the position it is in now. Goldman Sachs stands to benefit a great deal from this bailout.
  Furthermore there is a tremendous conflict of interest as Paulson seeks to hire those who helped create this mess to help decide how to use the public's money.

  From the proposal:

  (2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
  (3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

• The budget is unlimited.
  

  Sec. 6. Maximum Amount of Authorized Purchases. The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

  700 billion is greater than the Pentagon’s budget for 2009 which was record breaking. And that’s just the amount of purchases that can be held on the balance sheet at any moment.
• It doesn’t represent the tax payers. This deal is, in many respects, open ended with no safeguards for taxpayers. While the bill gives lip service to the idea of protecting tax payers it specifically avoids accountability and transparency.

  Sec. 3. Considerations. In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–
  (1) providing stability or preventing disruption to the financial markets or banking system; and
  (2) protecting the taxpayer.

• Completely dubious. While granting extreme powers, there is no review. (this one is really incredible)

  Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

• There are no stipulations for punitive actions. Instead for institutions able to move their bad debt to taxpayers, or able to buy debt at discounted rates this will be quite rewarding.
• The arbitrary nature of the bailout creates greater uncertainty in the markets. Furthermore some market watchers speculate that this could result in a greater devaluation of U.S. credit as there is fear we’ll nearly bankrupt ourselves trying to take on the debts of these failed institutions. The measure calls for raising the national debt for example.

  Sec. 10. Increase in Statutory Limit on the Public Debt. Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

• We already have an excellent solution in place Chapter 11 Bankruptcy.

  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 debt holders can agree to cut down the face value of debt, in exchange for some warrants.

  Luigi Zingales and Robert C. Mc Cormack the authors of the above quote maintain the process would have to be faster than chapter 11 normally takes. But passing a law, especially one of the magnitude normally requires much more investigation and vetting. If we can entertain passing a law of this magnitude this quickly, isn’t there a possibility that an expedited Chapter 11 program could be created.
• The Mother of All Bailouts. A measure of this level is unprecedented. You may have heard that this isn’t dissimilar to the Resolution Trust Corporation founded in 1989 to help us out of the S&L Crisis. But

  In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC's job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that preemption will avert the mass destruction of banks. There are cheaper ways to stabilize the system. (Sebastion Mallaby of the Washington Post)

  And they want to bailout whatever they decide. This will likely include bailouts for foreign businesses as well.

  The U.S. Treasury submitted revised guidance to Congress on its plan a ... Officials now propose buying what they term troubled assets, without specifying the type. (Bloomberg)

• It goes counter to the spirit of the American free system that maintains those that reap the rewards should bear the losses.

  The basic premise of a free economy is one governed by laws and not men, where property rights are respected, where individuals are free to make contracts with each other, and where honesty and transparency exist in the marketplace.(Mish)

Please contact your senator now and ask them to prevent, block, filibuster, and vote no for any bailout.

I’d also encourage you to drop me an email or a comment if you make the call.

Thank you.

Update: 10/2/2008

Dodd's revised version of the bill made what appear on the face to be significant changes. But upon further examination, the latest proposal doesn't deviate from Paulson's plan. The oversight is there but it's token oversight. The secretary of the treasury, for example would be the head of their own oversight committee. While we've heard sound-bites about greater assurances, very little has been done to alleviate the problems with the bill.

Anyone saying the problems have been fixed are mistaken. Read it for yourself. (First 113 pages or so.)

Let's Backup Quality Firms, not Garbage.

"Look to where you want to go."
"Reward good behavior, not bad."

Those are two axioms I've come to understand that really work in the real world. Applying them to the current financial situation offers some perspective on "what we need to do."

Talk about Moral Hazard
What are we doing now?

By throwing money at the losers the worst of bad behaviors is rewarded. The biggest, most interconnected faulty institutions are getting government assistance.While those that are more prudent and pragmatic are being ignored.

Look at Lehman versus Bear Stearns. Barry Ritzholtz says it best:

• Lehman Brothers was like the little kid pulling the tail of a dog. You know the kid is going to get hurt eventually, and so no one is surprised when the dog turns around and bites the kid. But the kid only hurts himself, so no one really cares that much.

• Bear Stearns is the little pyro -- the kid who was always playing with matches. He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood. The Fed stepped in not to protect him, but the rest of the block.

Because Lehman was a slightly better market player they and their investors didn't get the benefits of being bailed out, while the Bear, who's executives should potentially be prosecuted does.

Perhaps I'm being naive but wouldn't it be better to break things down, maybe back up smaller better institutions with some sort of government review of investment institutions? (yeah I know this should have been happening all along) It could be followed up with a 6 year guarantee or backing of some sort.

It's not the idea solution or the one that I want. But if you have to intervene in the markets this is better than throwing money at losers right?

Pelosi Barks at Bush and Bailouts

"Is it a free market if you privatize the gain and nationalize the risk?"

“This is crony capitalism manifesting itself in the meltdown of our financial institutions,” Pelosi said, lamenting the fact that taxpayer dollars would now have to be used to fund the bailouts."

VIA The Crypt

I have to admit I'm a bit jaded. This seems like a great way to help Obama and the Democrats case.

I'd like to see some sort of mea culpa of various Dems, mostly Chris Dodd, as they pushed through and authorized at $300 Billion Bank Bailout bill.

What I also worry about is Congressional Stock positions. From Capital Eye:
According to the nonpartisan Center for Responsive Politics, nine lawmakers have between $785,900 and $1.8 million of their own money invested in Merrill Lynch...Fifty-four lawmakers ... held stock in the company in 2007, worth between $1.9 million and $5 Million.

Eight lawmakers owned stock in Lehman Brothers at the end of 2007, valued at between $102,170 and $184,160.

And Again...

Of all of the companies facing major transitions over the last week, lawmakers owned the most stock in AIG. Twenty-seven lawmakers owned stock in AIG last year, worth between $6.4 million and $20 million.

Then there's campaign contributions with AIG, Bank of America, Lehman, and Merill Lynch contributing over $40 million to both sides of the aisle.

I'm going to leave out Fannie Mae and Freddie Mac for now.

Letter to Congress: Stop The Bailouts

Dear Congress Member

I've been very close to the markets for some time now. I'm very aware of the things that are going down now. I am also aware of many of the potential consequences as some of these institutions like AIG, Bear Stearns and others fail.

I submit to you however that these institutions must fail. By propping up housing prices, and the markets, prudent investors like myself, and better, functional institutions, are being robbed of actual cash by the less cautious, and more reckless market players.

Keeping these failing institutions is hurting market transparency, creating greater moral hazard in the marketplace, preventing new functional institutions from reinvigorating the markets.

I am one that believes very much in market policing, and I believe just as with FEMA and Hurricane Katrina, the bush administration has stripped the markets of much of the effective enforcement that could have mitigated some of the disaster we're facing now. But now, the current government intervention amounts much more toward Corporate Welfare, and a corporate run government. These actions do not represent the best interests of the markets or the people.

These actions seek to prop up institutions that have proven they are failures.

Please prevent tax money from going to these institutions. There are much better ways to let this economy adjust.

Thank you for your time and consideration.

The Definition of Insanity is...

I’ve been writing who ever I could for days trying to raise awareness about H.R. 3221 and it’s 300,000,000,000 bank bailout plan, and while I haven’t received a response, someone I asked to get involved in my lobbying efforts has. Here is an excerpt from a response from Senator Maria Cantwell’s (D WA) office.

“Each foreclosure can impose damages up to $80,000 to the surrounding community, including the loss of property taxes, the damage done to the prices of neighboring properties, and the cost of foreclosure related services performed by the government.

While I understand your frustrations with what appears to be a "bailout," I believe that we must closely evaluate every proposal and consider the best path forward that will stabilize our nation's faltering economy. The housing market is an integral component of our economy's health. Without action, over three million homes are likely to be foreclosed upon in the coming years, and approximately two million families affected. With such grave financial consequences, the coming foreclosure emergency must be addressed head-on, and Congress must take appropriate action.”

Mrs. Cantwell is right to be concerned about the affects of these foreclosures, but her response to the situation is misguided.

In a previous post I pointed out the evidence of moral hazard, investors, thinking the government won’t let these larger institutions fail, are doubling down on bad bets. This will exacerbate the problems we are facing.

We need money to go toward the smarter investments, not those that the government is backstopping because they are falling apart.

These interventions create market confusion and destabilize the currency. Prudent investors are left hanging. Markets need capital infusion, in order for that infusion to occur investors have to be able to discern what it is they might invest in.

In an April speech to congress Dean Baker laid out how H.R. 3221 will prolong a housing decline,and hurt homeowners. Homeowners end up in a worse position because they are unlikely to accumulate equity under the program and they end up paying more than they could pay otherwise. It makes home ownership less affordable, new buyers will less able to enter the market.

...doing the same thing over and over again expecting a different result.

Mrs. Cantwell expresses a concern about the problems cities are having with these foreclosures, I would submit to her that the money is better spent being sent directly to the cities. Doing a simple calculation with her own numbers shows that tax payers could save over $60,000,000. But that isn’t even necessary, shut down these institutions, and bring in smarter investment.

These banking institutions have already shown that they are incapable and inept. They are almost insolvent, don’t bail them out, shut them down. After shutting them down, repackage these mortgages into transparent securities so that new investment can make better decisions and infuse capital back into the system.

Allow these banks to die so that better entities can learn from their mistakes and help grow the economy again.

It’s transparency and confidence that we are missing. These problems will not be resolve by allowing more of the same behavior, with the same institutions.

HUD Secretary Speaks out on H.R. 3221

Further evidence that H.R. 3221 is a bank bailout does little to help homeowners, HUD secretary Steve Preston argues that taxpayers will be absorbing "preventable and foreseeable losses."

Preston argues that FHA needs to be able to implement risk based pricing.  This is interesting considering the mortgages this bill was written for actually fall outside the guidelines that would normally have had FHA backing.  What this risk based pricing would ultimately show however is that almost none of these loans are worth taking on for any investor.

The fact is here the banking industry made a risky bet, and they came back to congress, specifically Christopher Dodd, to bail them out, the potential cost to taxpayers?  $300,000,000,000.

Washingtonpost.com via The Real Estate Bloggers

Evidence of Moral Hazard from Bank Bailouts

Bloomberg.com:

"The bailout of Bear Stearns Cos. arranged by the Federal Reserve in March shows the government won't allow the companies to fail, Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina."

Recent action, like the Fed bailout of Bear Stearns, and currently the "Hope for Homeowners Act" are creating an environment that insulates investors from risky behavior.  By preventing them from facing the consequences of their investments they are more likely to take riskier bets.  This moral hazard threatens to harm the economy and worsen a decline.

Congress must not pass the "Hope for Homeowners Act" (section 257 of H.R. 3221) By backing these loans with GNMA it is  a 300 billion dollar bailout for banks, just like the $29 Billion dollar Bear Stearns/ JPMorgan Chase bailout facilitated by the Fed.

Hope For Bankers Act

It's no secret that H.R. 3221 is about to move on to the president for signing.    What's less understood is that a section entitled "Hope for Homeowners Act of 2008" was written by Bank of America.  The effect of the bill is to offload from lenders some $300,000,000,000 of some of the worst performing loans to taxpayers.

Senator Dodd (D CT) introduced the bill stating there would be no investor bailout, but a reading of the bill shows clearly that's what it is.

Dodd has been in the limelight  more recently for improprieties related to preferential treatment he received from one of the main beneficiaries of this bill  Countrywide Financial.  Furthermore the bill, was written by the other main beneficiary, Bank of America Corp.

This bill threatens to extend a housing crisis and the economic recession in that it harms prudent investors and prevents those less prudent from bearing the full consequences of their actions.

The section of the bill that provides for the bailout, and Bank of America internal documents can be found here.

http://sites.google.com/site/bankbailout/

Senators Kit Bond (R MO)and Jim DeMint (R S.C.) seem to be the only ones raising any concern about the bailout portion of the bill.

From an Associated Press Article

Rep. John A. Boehner, R-Ohio, the House minority leader, called on Rep. Barney Frank, D-Mass., to hold a hearing investigating allegations that Dodd and Sen. Kent Conrad, D-N.D., got preferential mortgages at the behest of Countrywide Financial Corp. CEO Angelo Mozilo. Countrywide, a leading subprime lender that has been blamed for helping to cause the mortgage meltdown, is among those that could benefit from the housing rescue.

"Democrats who receive sweetheart deals from their campaign contributors shouldn't be pushing legislation forcing taxpayers to bankroll a $300 billion bailout of scam artists and speculators, and the American people have every right to demand answers if they do," Boehner said in a statement.