WAPO: Treasury Illegally Repeals Tax Law

Monday, November 10, 2008 | 07:15 AM

Front page article in the Washington Post today, calling attention to a highly questionable aspect of the $750 billion bailout plan: A Quiet Windfall For U.S. Banks.

We learn from WaPo that the Treasury Department slipped through a $140 billion tax windfall to US banks -- in theory repealing 1986 legislation, passed by Congress and signed by President Reagan.

The likely illegal change was aggressively lobbied for by banking officials, who sought to take advantage of the market turmoil and credit crisis.This is an ongoing issue we have witnessed in every prior bailout: Opportunism knows no sense of decency.


Continued HERE

Monday, November 10, 2008 | 07:15 AM | Permalink
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Moral Hazard of the Coming Mortgage Bailout

Friday, October 31, 2008 | 10:09 AM

“Why am I being punished for having bought a house I could afford? I am beginning to think I would have rocks in my head if I keep paying my mortgage.”

-Todd Lawrence, Norwich, CT homeowner with a traditional 30-year mortgage


Herein lies the simple problem in trying to “save” so many mortgages: A huge swath of them should not be saved. Some of that is due to price, some of it is due to not wanting to reward irresponsible behavior, but the bulk of it is simply because the people living in these homes cannot reasonably afford to pay for them, even after a 20-30% workout.

There are now more than 10 million “home-owers” underwater, with their mortgages greater than the present value of their homes. Since they have little skin in the game — thanks to banks that did away with down payment requirements — there is little incentive for them to tough it out.

Not surprisingly, it is FDIC Chairman Sheila Bair who is leading the push towards a mortgage workout plan. She wants policy makers to take action to help people stay in their homes — thereby taking pressure off of the FDIC, which insures the banks.

Why? More foreclosures = more bank failures = bigger FDIC obligations.

The problem with this current rescue  plan is that it is designed to “prevent the continued downward spiral of the housing market.” But that is EXACTLY what the housing market needs — overpriced homes that are not selling need to come down in price. We had a normal price increase from 1996-2001, and then a near vertical set of price gains from 2002-06. Any framework for systematically modifying loans that fails to comprehend that is doomed to failure.

(permanent post here)

Continue reading "Moral Hazard of the Coming Mortgage Bailout "

Friday, October 31, 2008 | 10:09 AM | Permalink | Comments (75) | TrackBack (0)
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Adam Smith Was a Socialist

Thursday, October 30, 2008 | 02:30 PM

I hate politics. I cannot stand the maneuvering to avoid discussing issues, and instead focus on name calling. The latest idiocy is the entire Socialist meme, which, having seen the banking industry nationalized, is a bizarre charge to make these days.

It is especially odd, given the nature of wealth distribution in a capitalist system that has any form of taxation. Most economists would regard it as unexceptionable.

It can be traced to Adam Smith's "Wealth of Nations” (1776), his seminal treatise on capitalism. As Steve Coll pointed out in a The New Yorker column:

"The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."

-Adam Smith, quoted in the New Yorker, October 27 2008

Smith’s notion of reasonableness did not anticipate the Fox News Channel, however. Last Tuesday, [Joe the Plumber] appeared on that network, where he denounced Obama’s comments as “socialist.” He said that Obama “scared me,” because he “wants to distribute wealth.” Wurzelbacher also granted an interview to the advocacy group Family Security Matters, whose advisory board includes the conservative talk-radio hosts Laura Ingraham and Monica Crowley. By means unknown, Joe’s story of ambition and resentment reached the campaign of Senator John McCain."

I wish people would focus on the more mundane things, like How are we to regulate Wall Street, what should our economic and tax policy be, what should we do about energy, the war, etc.

Or, we could simply name call.

Steve Coll
The New Yorker, October 27, 2008

The Big Picture is moving! The new post here

Thursday, October 30, 2008 | 02:30 PM | Permalink | Comments (110) | TrackBack (0)
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Capital Gains Taxes ?

Sunday, October 19, 2008 | 06:00 PM

I think the debate on Capital Gains Taxes is now irrelevant.


The huge stock market losses.

Here's a thought:

Most people do not have any Capital Gains. I think the vast majority of investors, traders and business owners won't have to worry about paying Capital Gains taxes for quite a few years -- they will have a capital loss to carry forward instead.

That's currently capped at a tiny $3,000 per year per person.

How about raising the current limit of loss write offs to $10,000 or even $20,000 per year?

Sunday, October 19, 2008 | 06:00 PM | Permalink | Comments (75) | TrackBack (0)
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The Role of Fannie & Freddie

Sunday, October 19, 2008 | 03:30 PM

A very good description of Fannie/Freddie, via Doug Diamond and Anil Kashyap, posting at the Freakonomics blog:

"The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly. 

Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt.

But once the debt was guaranteed to be secure (and the government would wipe out shareholders if it carried through with the guarantee), no self-interested investor was willing to supply more equity to help buffer the losses. Hence, the Treasury ended up taking them over."

That's about as cogent an explanation as I have come across . . .

And to repeat what I have written ad nauseum, Fannie/Freddie were cogs in the great housing mess, but they were not the proximate cause of either the boom or bust, or the eventual credit collapse.


Diamond and Kashyap on the Recent Financial Upheavals
Steven D. Levitt
Freakonomics, September 18, 2008,  10:04 am

Sunday, October 19, 2008 | 03:30 PM | Permalink | Comments (25) | TrackBack (0)
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Economist Debate on Regulation: Scholes vs Stiglitz

Friday, October 17, 2008 | 02:00 PM

Very cool debate at the Economist:

JOSEPH E. STIGLITZ:   The current crisis is caused, in part, by inadequate regulation. Unless we have an adequate regulatory system—regulations and a regulatory structure that ensures their implementation—we are bound to have another crisis.

:  There is now a rising chorus among regulators, politicians and academics claiming that the freedom to innovate in the financial domain should be curtailed.

Me: Over the past 30 years, the United States has moved from an environment of excessive regulation to excessive deregulation. This philosophical change was taken to irrational extremes, and it lay at the heart of the current financial crisis.


Click for debate

Friday, October 17, 2008 | 02:00 PM | Permalink | Comments (43) | TrackBack (0)
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New Bailout Price Tag: $2.25 Trillion Dollars

Wednesday, October 15, 2008 | 11:00 AM

15bailoutgraf01 On Monday, I said that the total cost of this bailout could scale up to $3 trillion -- I just didn't imagine it would happen by Wednesday.

We learned yesterday that the size of the bailout just tripled, from $750b to $3T. Here is the cost structure:

$250 billion of capital into banks;

Guarantee $1.5 trillion in new senior debt issued by banks;

Insure $500 billion in deposits in noninterest-bearing accounts (primarily businesses accts).

In exchange for this largesse, the treasury, on behalf of taxpayers, receives:

Preferred shares that pay a 5% (rising to 9% after five years);

•No voting rights for government;

• Warrants to purchase common shares = to 15% of initial investment

All told, its a massive program that makes my earlier forecast of 2-3Trillion obsolete. New forecast is now double: $4-6 trillion dollars . . .

More details at articles below . . .

Drama Behind a $250 Billion Banking Deal
NYT, October 14, 2008

Bailout Critic: Plan Could Cost $3 Trillion
ABC NEWS Business, Oct. 13, 2008

Americans Embrace Big Government to Help Solve Market Crisis
Edwin Chen and Matthew Benjamin
Bloomberg, Oct. 15  2008

Devil Is in Bailout's Details
Government's $250 Billion Cash Injection Sparks Welter of Issues
WSJ, OCTOBER 15, 2008

Wednesday, October 15, 2008 | 11:00 AM | Permalink | Comments (46) | TrackBack (0)
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To Regulate or Not?

Wednesday, October 15, 2008 | 07:10 AM

I am working on something for The Economist -- its an Oxford style debate on the current crisis.  The proposition being discussed is: "This house believes that it would be a mistake to regulate the financial system heavily after the crisis."

Any comments you may have on this would be appreciated -- my final version is due later today.

My biggest problem is trying to cover a lot of ground in just 500 words . . .

Continue reading "To Regulate or Not?"

Wednesday, October 15, 2008 | 07:10 AM | Permalink | Comments (105) | TrackBack (0)
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Goal: Increase Minority Homeowners by 5.5 Million in a Decade

Tuesday, October 14, 2008 | 10:00 AM

Guess who's goal this was? You might be surprised:

"More and more people own their homes in America today. Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That's a home ownership gap. It's a -- it's a gap that we've got to work together to close for the good of our country, for the sake of a more hopeful future. We've got to work to knock down the barriers that have created a home ownership gap.

I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families . . .

Home ownership is also an important part of our economic vitality. If -- when we meet this project, this goal, according to our Secretary of Housing and Urban Development, we will have added an additional $256 billion to the economy by encouraging 5.5 million new home owners in America; the activity -- the economic activity stimulated with the additional purchasers, the additional buyers, the additional demand will be upwards of $256 billion. And that's important because it will help people find work."

- George W. Bush, U.S. President, October 15, 2002 1:55 P.M.
(video after the jump)


Last week, we mentioned this speech from 2004. Fast forward to today's excerpt, from an even earlier, 2002 speech.

Why keep bringing these up? Because it derails the false argument brewing amongst those on the right who blame the 1977 CRA or the 1938 Fannie Mae for the current housing and credit problem. I have zero patience for this nonsense, and am unafraid to call people on it.

Nothing in any of these Bush speeches that pushed for more lending to minorities and increased lower income home ownership caused the problem. Neither did any similar Clinton speeches. Nor did related the legislation related to the Bush speeches, nor did the CRA, nor Fannie Mae or Freddie Mac. Indeed, none of these actions required the sort of reckless lending that we saw from 2002-2007.

Understand this simple fact: In an ultra-low rate environment, where prices are appreciating rapidily, and mortgaes are being securitized, ALL THAT MATTERS IS THAT THE BORROWER NOT DEFAULT IN 90 days (or 6 Months). The goal was to make a loan that did not default in that period of time, it cannot be put back to the originator.

As a mortgage salesman, you only lose your a fee if a borrower defaults within 3 or 6 months. What do you do to maximize your returns? The best way to do that -- to put people in houses that would not default in 90 days -- was the 2/28 ARM mortgages. Cheap teaser rates for 24 months, then the big reset. By then, it was no longer your problem.

Can you grasp what a monumental change this was? Instead of making sure that borrowers could pay back ALL OF THE 30 YEAR FIXED MORTGAGE, you only had to find people who could afford the teaser rate for a a few months. THIS WAS AN ENORMOUS AND UNPRECEDENTED SHIFT IN LENDING.

This is the key to the hosuing boom and bust, anbd ultimately underlies the entire credit freeze. And, it would not have been possible without the Greenspan ultra-low rates, which made the teaser portion (the "2" of the 2/28) of these mortgages so attractive.


Those who continue to blame the CRA, Fannie Mae, etc. reveal their fundamental misunderstanding of how credit operates in general, what the financing process was like from 2002-07, and how this situation came to pass. Or worse, they understand it, and choose to lie about it anyway for partisan political purposes.

You either understand these simple facts, or you don't. If you cannot comprehend this, well, then, I am at a loss as to what that says about your cognitive functioning. But if you understand this, but spit out the nonsense anyway, then you are merely a partisan with no respect for the truth.

And that seems to be the main people blaming the CRA and Fannie/Freddie for the credit/housing crisis -- those folks who either can't think -- or wont.



President Hosts Conference on Minority Homeownership
October 15, 2002 1:55 P.M. EDT

Continue reading "Goal: Increase Minority Homeowners by 5.5 Million in a Decade"

Tuesday, October 14, 2008 | 10:00 AM | Permalink | Comments (150) | TrackBack (0)
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Long Overdue Capital Injection

Tuesday, October 14, 2008 | 07:28 AM



Here we are, more than one year into the credit crisis, and long after the collapse of Bear Stearns, and a month after Lehman Brothers, AIG, WAMU, Fannie/Freddie, Wachovia, etc. and we are getting a capital injection into the key banks.

As we noted yesterday, Paulson (and to a lesser degree, Bernanke) were way behind the curve in recognizing the Housing, Economy and Credit issues.

Although Paulson was against the capital injection, the Fed chair was not. the As Krugman noted yesterday, "this was also the solution privately favored by Ben Bernanke."


Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben S. Bernanke and FDIC Chairman Sheila Bair are scheduled for a press conference at 8:30 am . . .


graphic courtesy of NYT




Joint statement by Federal Reserve, U.S. Department of the Treasury, and Federal Deposit Insurance Corporation (FDIC)

President's Working Group Market Stability Initiative Announcement

Treasury Said to Invest $125 Billion in U.S. Banks 
Robert Schmidt and Peter Cook
Bloomberg, Oct. 14 2008

U.S. Investing $250 Billion in Banks
NYT,  October 13, 2008

Gordon Does Good
NYT, October 12, 2008   

Bank Bailouts to Make Recession `More Manageable,' Volcker Says
Chen Shiyin
Bloomberg, Oct. 14 2008

U.S. to Buy Stakes in Nation's Largest Banks   
WSJ, OCTOBER 14, 2008

Intervention Is Bold, but Has a Basis in History 
NYT,October 13, 2008   

Tuesday, October 14, 2008 | 07:28 AM | Permalink | Comments (58) | TrackBack (0)
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