In 1993 Bill Clinton signed off on an official memorandum that was to become HUD's new defacto policy: The National Homeownership Strategy: Partners in the American Dream, which was to deliver on the Clinton administration's promise to extend home ownership into lower income neighborhoods. His goal was to increase home ownership by noticeable numbers within his first term as president, a seemingly noble goal; however, the details of this would be felt in spades years later, employed and produced under the law of unintended consequences as is always the child birthed from the mother of social engineering. This memo, which HUD via congressional help effectively set as Fannie and Freddie policy was available right on the HUD website until the housing collapse hit the front pages. There is little wonder why it has since vanished in my estimation. Joseph R. Mason, a finance professor at Drexel University’s LeBow College of Business, a senior fellow at the University of Pennsylvania’s Wharton School, and a consultant at Criterion Economics noted the following excerpt from the policy's language source:
"For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership."
Notice the stressing of "creativity" in overcoming these traditional "impediments." You know, such as actually being able to afford the home you're buying, impediments such as those. This begat a series of creative methods available to homebuyers. Among them were the 100% to loan financing - zero down; the sub prime rates, quite literally setting interest rates below the prime rate in order to squeeze payments just within reach. And everybody's favorite "interest only" loans allowing buyers to purchase three to four times the amount of house they could afford on their income in a "standard" loan. Now, these practices did indeed allow many lower income buyers into the market. But it didn't stop there. HUD estimated that nearly 600,000 new homeowners would be created in the first year (multiply that out over 13 years), but not all of them were the intended target. You see, you can't lower the standards (or at least they didn't) for "only" minorities or certain groups. These new standards were available to everyone: dentists, day traders, executives, et al - all people who saw the housing markets surging and jumped in utilizing these new "creative" programs in order to flip a house they never intended to live in for a profit. Add to that those whom bought homes they did intend to live in, but bought 3 to 4x's out of their range because they could pour the mortgage into one of these new programs and qualify. And all of that is in addition to the lower income families who were qualified for home ownership outside of traditional routes. And it was a self sustaining cycle - as more and more utilized these "progressive" new programs and standards the housing bubble grew, housing prices went through the roof and more people wanted to jump in, inflating the bubble even further. Each added fuel to the housing fire that seemed to have no end in sight. And since Fannie and Freddie were buying up the majority of these new loans, the lenders figured "why not", the government is the de facto backer of F&F, so the loans are "guaranteed."
Then it burst.
Housing prices fell through the floor as the markets corrected the artificially inflated prices. Between low income owners that could no longer afford the monthly note, or investors that were caught holding 3 to 10 houses they never intended to live in and notes they could not maintain, or owners paying interest only with an untouched principle now larger then the home value - no one could now sell the homes they owned for the amount owed, and they default. There goes Freddie and Fannie as the largest holders of these notes, and there is the beginning of the September 2006 economic spiral down. But it gets worse. In the meanwhile, during the housing boom times, AIG had purchased 50% of Fannie's now toxic debt. They begin to wobble. They are, among other things, the largest insurer in the world. Their tentacles stretch into Citi Bank, Goldman Sachs, Bear Sterns . . . sound familiar?
So Bush is looking at a complete financial sector meltdown, which in turn could freeze cold small business, the back bone of the American economy, which depends on loans from this sector to survive and expand. What to do? He is at this point left with 2 options, 1.) he could explain everything I just wrote to the American people in a joint session of congress. This has many prickly sides to it. After all, he continued the Clinton-era policy because it dovetailed with his "ownership society" message and policies, so he was also culpable. In addition this would require the government to go in and cut out the cancer of toxic debt - a surgical strike at the cause, quite literally buying up AIG's Freddie and Fannie investment's, and all other's who now held the bad mortgages. But then the government would be the new lien holder so either they would have to evict millions of people, and seize millions of investment properties - at a time when we are closing in on a presidential election year, poor people being tossed out? I don't think so. Or simply mail these home owners the deeds free and clean. Again no good in an election cycle -those maintaining their mortgages would be rioting in the streets, free houses?! Why would anyone bother paying another month's mortgage? Simply default and wait until the government sends you the deed. Neither of those options are politically viable. Plus, under option number 1 the wholesale reform of Freddie and Fannie would need to be undertaken. Bush attempted that reform in 2005, with the aide of Senate heavyweights like John McCain (whose floor speech warning of a F&F collapse I pasted here last year). But Chris Dodd (D) CT, and Rep Barney Frank (D) Massachusetts, warned the White House and GOP leaders that was a non starter. That the solvency of F&F was assured and that no one was going to touch the ownership legacy of Clinton and his Party in congress, and on the heels of Katrina Bush hadn't the political will to fight them. So option #1 was solidly off the table. But Bush can't pull a Hoover - be seen as doing nothing (although that's a distorted view of Hoover, it's the historical perception). So what to do? Introduce option #2. Have your Treasury Secretary declare the 6 words that may come to haunt him more then "mission accomplished" ever did: "AIG is too big to fail" (and may I add here - if any one company is "too big to fail", then perhaps it is "too big" to exist, and just maybe channeling the ghost of Teddy Roosevelt is warranted). Paulson is careful not to discuss the particulars of what is causing them to fail, just declare the funds needed and get the money. And guess what? A Democrat controlled congress is only happy to oblige - remember, in option #1 they are culpable too. And the urgency is stressed in the "mark to market" pricing of AIG. That being the company total value. Once upon a time "total value" was determined by what they call a "5 year average." And as the name implies a company could list their total value based on a 5 year average, going backward or forward. So, you have a bad year C, you average A, B, and the out year forecasts for D & E and use that formula to tell the street (Wall Street) your total value. It was a stabilizing system to reduce volatility in the markets. Total value affects the individual stock price similarly to how oil prices effect how much you pay for a gallon of gas. But, the highly successful practice of employing the "5 Year Average" was ended by congress with one word: ENRON. In its traditional reaction of killing a housefly with a cannon ball, congress changed the rules of listing a company's total value based on what it is worth that very day. That very day or "mark to market" pricing. Meaning that if AIG isn't bailed out on the double, it could collapse any given day, crushing the financial sectors not just in the US, but other Western nations as well. There was the possibility of a world wide depression.
So, you have this perfect storm brewed up, two administrations, and multiple congresses involving the 2 major parties all culpable. They get together and decide that option #1, although less costly financially to the tax payer, is much too costly politically. So instead of the surgical removal of the toxic debt, they treat the entire patient - they simply throw money at AIG. This doesn't remove the debt mind you, it just hopefully balances their books and limps them along until the debt can be reconciled in the private sector.
But it gets worse. Has anyone ever read the bailout legislation? TARP, or the "Troubled Asset Relief Program" basically makes the Treasury Secretary the most powerful man in the country. And power is most easily allotted by making the language of the law as vague as possible. And I quote from T.A.R.P:
[definition of Troubled Assets] ... any other financial instrument that the Secretary [of the Treasury], after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.
The SoT decides, then informs congress of how he has decided to spend the money. Of course streamlining this to one man, one authority is necessary because we are in a "crisis." I wonder how you say that in German? Now, Bush's Secretary is Paulson, the former Charmain of a little outfit named Goldman Sachs. So Paulson sends the multi billion bailout to AIG . . . but guess what (yes, it actually does get worse)? Paulson knows the tentacles of AIG are far and world wide, so he authorizes them to send 60%, nearly $101 billion dollars to outside entities: Goldman Sach gets 12 billion; Meryl Lynch $7 billion; Citi Bank $11 billion; UK banks $13 billion; German banks $17 billion, and that's not the full list. And at that time each and every one of these organizations was giving out executive bonuses along with Lynch looking to dump Bank of America to balance its books. Now if some of these names sound familiar, as in they received their own bailouts, they did! Many of the recipients in the TARP legislation have been double dipped by the Treasury department because Paulson allowed AIG to be a clearing house of these smaller "off the books" (as in AIG handed them out) bailouts when he had control of the first 50% of TARP. Then Geitner (in control of the second 50%, per congress) came along and "bailed out" these companies individually! It's the biggest shill game in the history of man kind. And still, to this very day, the toxic debt that originated with Fannie and Freddie, crept into and nearly paralyzed AIG, Bare Sterns, and all the lower companies such as Citi Bank IS STILL OUT THERE! All the tax payer money has done is to attempt, and I stress attempt, to balance these books so as to make their mark to market rating stable. And in the hope that if this is accomplished the toxic debt will reconcile itself either with a comeback in housing & the economy in general, or that the "debt risk" is spread out over enough quarters that it doesn't drop the companies rating (such as the too big to fail AIG), using bailout monies in the meantime to balance each quarter's books - in which case our trillions are merely buying them time.
And I am supposed to display "outrage" over the $165 mil to AIG execs? Or focus on how many homes Mrs. Madoff still owns? Are they serious? I suppose the "are they serious" question will be answered by our Commander-In-Chief Thursday night . . .when he appears on Leno (the first ever sitting president to do so).
Focusing on AIG execs and their bonuses is merely a game of distraction. You see, the question quickly becomes - what if they (all recipients of the multiple bailouts) go through the nearly trillion in bail out funds allotted, and the markets have not rebounded to the point that the toxic debt has been reconciled? What then? Then we are back at square one, a trillion dollars lighter. The entire scheme is a book balancing act hoping to limp these companies along until they can become profitable to the point of self absolving their bad debt. And the "what if" problems soon begin to multiply when you realize that none of this, none of it, has constrained our new president's ideology. He still went through with a $787 billion stimulus package that stimulates nothing more then left wing pet projects. He is still going to pass his $3.4 trillion dollar budget, which is more tax dollars spent then every president from George Washington to George W. Bush, combined. Meaning a hyper perfect storm is in the making - the spending devalues our dollar while the market tanking/energy costs runs us into inflation. You end up in the Wiemar Republic of Germany, rolling your pay checks home in a wheel barrel, burning them for heat once you get there because they are more valuable as a flame accelerate then they are as a payment to your gas company.
Enter the strong man . . . exclaiming democracy is a messy business.
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