Shane’s Drivel

Thanks, Democrats!

Excerpts from a 1999 New York Times article:

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.”

…

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.”

…

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.

Let’s say you’re short on cash and you’ve got some bills due. Your creditors are laying heavy pressure on you to pay-up. You’ve got plenty of assets to cover the debt, but assets take time to sell and your neighbors aren’t in a buying mood. So you head to a pawn shop.

The pawn shop says, “sure I’ll buy your car – for 25% of market value”. Strapped for cash, you’ve got no choice. You get some cash, pay your bills, and the pawn shop has a car they’ll most likely sell for a good profit.

Now would you call situation a “bailout”? Did the pawn shop do you any favors? They might have gotten you out of a jam, but they made no sacrifices to do it.

That situation is pretty much what’s on the table with the “bailout” of our financial system. Because too many Americans took mortgages they couldn’t afford, banks have ended up strapped for cash. All those mortgages and other assets aren’t worth what they used to be worth. But they still have a value. The banks are short on cash and need to sell these assets. Since all the banks are hurting, nobody is in a buying mood. So the government is being asked to play the part of the pawn shop.

The Treasury Department’s proposal is for the Federal government to buy those assets at a substantial discount to market value (not a discount to the inflated face value, but a discount to present market value) so that banks can write off the difference as a loss on their balance sheets, take the cash, and continue doing business. The government would hold the assets until the financial markets stabilized, and then sell the assets to the highest bidder. In all likelihood, the government would profit, although this is not the purpose behind the proposal.

The purpose of the proposal is to prevent Great Depression II, which is what we’d have if all the major banks went out of business or stopped operating. Sure it would cost the government money to implement this plan. The government has to sell T-bills to raise the cash to buys the bank’s discounted assets.

Its EXACTLY like the pawn shop example except that the pawn shop owner has to take out a loan to initiate his side of the transaction. But the pawn shop still stands to profit and should have no problem at all at least breaking even on selling assets which were purchased at a substantial discount.

So please, folks, let’s not call this a bailout. “Bailout” has a connotation that implies “giveaway” or “handout”. These banks are taking it in the shorts, I guaranteed you. All we’re doing here is ensuring their stability, the survival of the nation’s financial system, and staving off Great Depression II.

Enter Democrats.

Democrats are doing their best to screw this up. Under the guise of making amends to the public for funding such a “bailout”, Democrats are trying to add ancillary populist bullshit to the proposal.

On their agenda is a cap on corporate executive compensation for any bank that takes part in the “bailout”. Now what material purpose would that serve? With respect the size of the “bailout” this provision isn’t a grain of sand on the beach. This addendum serves only to stroke Democrat constituents who hate corporate America.

I’m not defending corporate executive salaries. Be that as it may – the last thing a struggling bank needs is to be prohibited from paying market value to the kind of top notch CEO’s they need to keep their companies viable.

The next worst Democrat-insisted provision is federal confiscation of equity in whatever companies want to participate in the “bailout”. Democrats want dollar-for-dollar exchange of corporate stock for any “bailout” money that changes hands. This ridculous addendum makes no sense.

That’s like the pawn shop owner insisting on partial ownership in your house in exchange for his buying your car at a fraction of market value. Ludicrous.

Furthermore, the equity confiscation proposal promotes more of the problem that the government is tyring to fix. Such a provision woul dilute (de-value) the value of bank stocks. Maybe Democrats weren’t paying attention when just last week we saw that declining stock prices in Lehman and AIG leg to their credit rating being downgraded, which led to a slew of cash requirements those companies couldn’t meet and that ultimately led to bankrupcy. Way to go, Democrats! Propose something that leads to more of the problem that you’re supposed to fix!!!

Democrats insist these things are critical to balance the political and monetary costs of the “bailout”. Please. If there’s any political cost, that costs exists in as much as Democrats continue to obfuscate the motivation, costs, and consequences surrounding the “bailout”. The monetary costs here, provided the government doesn’t profit in the long term, are infinitesimal in comparison to the cost of doing nothing.

So quit screwing around, Democrats, and just sign on to what the non-partisan Treasury Department and Federal Reserve are proposing. If it were up to me, you wouldn’t’ have a vote in the situation. Not because I’m conservative, but because its your policies (yes, YOU, Democrats) for Fannie and Freddie which encouraged required banks to issue mortgages that homeowners could not afford.

Or more specifically, as is said in the movie “Outlaw Jose Wales” – don’t pee on my back and tell me its raining.