An Economy in Crisis
Following years of a Republican policy of deregulation in the financial market, the economy is in crisis. Institutions granting bad and fraudulent loans contribute to a real estate boom and record profits for the lenders, but they become overextended and the system falls apart. As a result of the mismanagement and fraud, ordinary citizens lose their jobs, their homes and their life savings. The federal government steps in with taxpayer money to bailout the institutions and prevent a complete economic collapse. Meanwhile, the executives from these institutions keep their mansions and yachts and the spoils of their misdeeds. The year is 1987.
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Just over 20 years ago, it was VP George H.W. Bush in the White House and John McCain was in the Senate. Bush's son, Neil, was a director of the Silverado Savings and Loan which cost taxpayers over a billion dollars when it collapsed. Neil Bush was found guilty of "breaches of his fiduciary duties involving multiple conflicts of interest." Meanwhile Sen. McCain was trying to get his close friend Charles Keating, owner of the Lincoln Savings and Loan, out of a jam.
Keating's operation was under investigation by the Federal Home Loan Bank Board. But since Keating had given McCain significant contributions, invested in a business with Cindy McCain, and flown the McCains around in his jet and let them stay in his lavish vacation retreat in the Bahamas, McCain went to the FHLBB, along with 4 other senators, to pressure them to leave his crony Keating alone. In a series of meetings, McCain and company tried to strongarm the FHLBB into backing off their investigation. When asked if he thought his contributions had given him influence, Keating replied "I want to say in the most forceful way I can: I certainly hope so."
The efforts of McCain and the rest of the "Keating Five" to interfere with an investigation and regulation of a federal agency on behalf of a contributor, resulted in an investigation by the Senate Ethics Committee. Although McCain admitted this was the "worst mistake of his life," he continues to oppose regulation in the financial industry. Was the mistake getting caught?
Now, in 2008, we are in an eerily similar financial crisis and John McCain is running for president. Will his solution be to protect and bailout his cronies on Wall Street who have profiteered our economy into shambles? That's what his partner-in-crime George W. Bush has proposed. We can't afford 4 more years of the same.
Pass this along to everyone you can!
The Bailout - A Simple Explanation & Plea for Action (received via e-mail)
I am not a financial expert, but I have been following this crisis very closely for over a year, and I am a lawyer (for what that's worth). The current financial crisis is very confusing, and this Administration is using that to their advantage to rush through a bill that gives the Treasury Secretary, Henry Paulson, a former partner at Goldman Sachs, absolute unfettered power over $700 billion of our taxpayer money. This Administration does not have a good record when given unfettered power (FISA, Guantanomo, the Iraq War). Most people I talk to don't really know that much about the situation, so I put together a super-simple explanation below. It is, of course, incomplete, but will give people an idea of the basics.
The main thing is: we need to take action now & reach out to our representatives, which hopefully you will see when you read this email. THIS BILL LIKELY WILL BE PASSED THIS WEEK. The bill before Congress gives Paulson/Bush $700 billion of our taxpayer money -- more than twice the cost of the Iraq war -- to buy the near-worthless to worthless "assets" of American AND foreign financial institutions at above-market prices. As drafted, this bill gives Paulson the power to pay any price he wants, and his decisions/actions are NONREVIEWABLE by any court or administrative agency. The bill specifically says that he cannot be prosecuted for any actions that he takes (which in and of itself should make us nervous). Once we own these "assets" by the way, he will be able to hire his cronies to manage them, and there are no restrictions on the amount of fees he can pay them.
What can we do? All we can do at this point is call and email our representatives, repeatedly, to demand that they build in protections for us into this bill (see talking points below). Their information is available at www.congress.org – put in your zip code in the upper right search box and it will tell you who your reps are and link to their contact info. If you are in New York State, call Hillary Clinton at 202-224-4451 and 212-688-6262; and Chuck Schumer at 202-224-6542 and 212-486-4430. If you are in midtown Manhattan, your Congressional reps are Carolyn Maloney at 202-225-7944 and Jerold Nadler at 202-225-5635 and 212-367-7350.
For those of you who want to know more, here is a very stripped down, simple primer of what has happened & what is going on:
HOW WE GOT HERE:
Over the past several years, the housing boom was created by the loosening up of lending standards so that just about anyone, regardless of income, could get a mortgage. This happened because commercial banks were able to "sell" the loans they made to financial institutions, which in turn bundled lots of mortgages together, and sold them as mortgage-backed securities (MBS). They sold them to investors, including many foreign investors in China and other countries. Because the loan originators were no longer holding the loans, it meant that they did not take on the risk of getting paid back by the borrower. The banks making the loans got lots of fees for originating the loans, and then they got them off their books by selling them to the financial institutions. The banks therefore had an incentive to make as many loans as possible, regardless of whether the borrower could really pay. So they stopped requiring documentation of income and assets (the so-called "no doc" loans, aka "liars loans"), and they started getting creative with financial instruments like Option ARM mortgages, which enticed borrowers with low introductory rates, telling them not to worry because "housing prices always go up" and they could "always refinance". Because more people had access to credit, there were more people with more cash in the market for homes, which bid prices up and up. As a result, for a long while, the Ponzi scheme worked.
HOW THE PARTY ENDED:
Then how did it all come crashing down? It turns out that people who said they had X amount of income but didn't, couldn't make their mortgage payments – often even at the introductory interest rates. Once the mortgages "reset" at the higher interest rates, they definitely couldn't afford them, and they started defaulting.
So what does this do the mortgage-backed security when the underlying loan isn't repaid? Remember an MBS is just a bundle of these mortgages, so the holder of the MBS is sitting back waiting for all of those mortgage payments to come in & that's where the asset's value is. If people stop paying their mortgages, the MBS is not worth what they paid for it. (This is really simplifying here but…) So assume you own an MBS, and if every person pays 100% of their mortgage back, you get $100. If that were to happen, and there were no risk, then say your MBS is worth $100. But suppose people are defaulting right and left already (as they are), unemployment is going up (as it is), prices for food and oil are going up (as they are) and interest rate resets are coming up (as they are). Say the market is looking at what is happening & saying, realistically, you are probably getting about 20% of those mortgage payments in and you can forget about getting the rest of that money. Sure the mortgage holder gets the house, but with so many houses in foreclosure at once creating oversupply, the house value has dropped, and so it isn't worth much – plus there are many transaction costs associated with foreclosure. Therefore the MBS you hold is worth, say $20 instead of $100.
Now imagine you are an investment bank, with lots and lots of these very mortgage-backed securities. As it turns out, the market wants to pay you $20 for each of these securities. But, if you sell for that price, then you will go bankrupt. You have been listing these assets on your books at a much higher price (say, I don't know, $100), so if the true market price comes out, then your liabilities exceed your assets, and you are gone, and all of that stock in your nice investment bank goes to zero. Importantly, if any OTHER investment bank starts selling its very similar MBS assets at market price, then everyone in the world knows the true value of YOUR MBS as well (which is one of the reasons why JP Morgan bought Bear Stearns, and why the Fed was willing to help out – that price discovery would let everyone see what these investment banks are really worth).
THE CREDIT SQUEEZE:
The current crisis is caused by a complete freeze in the credit markets. It turns out that it isn't just mortgages that are a problem – the overabundance of easy credit has spread everywhere (student loans, credit cards, corporate bonds, municipal bonds), and now people are not paying back so much. Which means that anyone with cash (like commercial banks, that hold our deposits) are quite nervous about lending ANYONE any money. The Federal government has tried hard to make lending cheaper, with rate cuts (which makes it cheaper for banks to borrow from the government), but it hasn't worked. Everyone is scared to lend.
HOW THEY WANT TO "FIX" IT (as in "the fix is in"):
Here's where we, the taxpayers, come in. Paulson wants to take our $700 billion, and buy these mortgage backed securities from the financial institutions. But he obviously can't pay the $20 that the market is offering in my example (otherwise, the market would have done it already). He is going to pay, say, $60. Then we will hold the mortgage & if people pay back the $60, then we are fine. But the market (that once-great free market the Republicans have always touted until now) has now pretty accurately figured out that is not going to happen. So we are going to pay $60 and then maybe one day down the road, we will get $20 back. The other $40 goes right to the investment banks and other financial institutions that we are buying from – which means that those guys who got us into this mess, get to keep their nice bonuses and their stock stays up. The idea here is that the banks are made solvent again because they've gotten rid of these bad assets (and given them to us), and so the borrowing & lending can resume. Yes, it's corporate welfare paid from "Main Street" right to "Wall Street." Is there another solution? Not that anyone can think of. The bailout is pretty much inevitable in some form or another.
WHAT WE CAN DO:
Realistically, not much. There will be a bailout, and there probably has to be or else businesses can't get loans, they can't make payroll, can't make stuff, etc. The economy will grind to a halt unless something is done. But the important issue here is that, under the current proposal, Paulson picks the price that we pay for the MBS's – so whether we are giving the banks $25, $40, or $60 for mortgage-backed security…Paulson decides and NO ONE can review that. Paulson owns, by the way, an awful lot of Goldman Sachs stock.
Right now, at a bare minimum, we need to make sure that this process has some built-in oversight and protections for us, so that we are not just writing a nice big bonus check to the Goldman Sachs partners, and getting nothing in return.
If you are OK with unlimited power to the Bush Administration to pay their buddies whatever prices they want, then do nothing, because that is what is going to happen. The Democrats are looking at it this way: if the plan fails, they blame the Republicans. If the plan succeeds, they can't have been said to have slowed down the rescue or impeded it in any way. So guess what? – this plan will pass, as a matter of political necessity. They are counting on our ignorance and complacency. And by the way, they are about to have a recess so that they can go campaign for the elections, so they want to get this done fast. Paulson has also scared them to death – they don't really understand what is going on and he has promised them Armageddon if they don't pass his bill fast, no time for regulation or oversight, he says. Don't let them off so easy!
If you want to build in some taxpayer protection, on the other hand, CALL AND WRITE your representatives, tell them you UNDERSTAND what is going on (even if you don't fully) and you won't stand for it. Here are some talking points:
TALKING POINTS (BASIC):
I am a taxpayer and voter and I understand what is going on. I strongly oppose the bailout, but if there must be one, then I demand that this Administration not be given unfettered power. I demand that:
1- that we appoint a bi-partisan oversight committee which must, among other things, approve pricing or the methodology by which prices are determined,
2 - the taxpayers receive warrants in exchange for purchasing these mortgage-backed securities,
3 - there are caps on executive compensation for the companies taking advantage of the plan,
4 - there is an expiration date on the powers conferred,
5 - the decisions of this entity/Paulson ARE subject to review by administrative agencies and courts.
TALKING POINTS (DETAILED):
Here is a detailed list of what the bill should mandate:
● a website that listed IN REAL TIME each transaction purchased by the government. This would list the details of the asset, the par value, the selling institution, the underlying characteristics, the originators of the loans, the price the government paid (and eventual sold the asset for) and any other relevant detail.
● limitations on and reporting of fees to organizations used as agents for implementation of the bill.
● limitations on executive compensation and dividend payouts for any firm receiving a subsidy.
● mandatory dilution of common and preferred stock, FBO the US taxpayer, for any institution receiving aid.
● criminal penalties for firms that collude in raising the offering prices at the "reverse auctions" to be used.
● restriction of purchases to specific categories of securities.
● restricting purchases to instruments more than one year old.
● prevention of subsidies to foreign firms and governments.
● forbidding the use of any monies to manipulate, directly or indirectly, the price or future prices of any stocks, bonds, currencies, or commodities
If you find this to be helpful, please pass it on.
