Pretty impressive.
Ninety five Democrats joined a large number of Republicans to defeat the bailout by 13 votes.
A southern congressman (I didn’t get his name) said on the House floor that the defeated bill was a cow pie with a marshmallow in the middle.
Meanwhile, the House today is being presided over by a black woman dressed in African-style robes.
- end of initial entry -
Thucydides writes:
It is amazing that nobody has mentioned that the package that just failed did not address the ongoing creation of subprime mortgages. It was simply a plan to purchase bad paper created in the past, specifically before September 17, according to one report.
As we speak, new bad paper is being created every day and shoved to or through Fannie and Freddie. So this package was only a “fix” in the sense of a fix given to a junkie. Nothing was done to address the addiction.
What is the point of spending all this money if the problem is not being addressed?
Paul K. writes:
The Cato’s Institute Arnold Kling gives a good explanation (though admittedly long and tedious) of the mortgage crisis at the blogging heads site.
At the end, he says the bailout represents an effort to save the status quo: “This is still very much the Wall Street-GSC Industrial Complex, and this is still the same congressmen and senators who were bought and paid for by Freddie Mac and Fannie Mae and Wall Street, and the whole point of the plan is desperately to try to put Humpty Dumpty together again so that we will somehow go back to mortgage securities issued by Freddie Mac and Fannie Mae, trading with nice fees and profits on Wall Street. It’s not any kind of check and balance, it’s a tight interweaving of Big Finance and Big Government.”
I don’t know where this crisis is going, but I am impressed with the Republican congressmen who stood against this bill. The sight of Nancy Pelosi, Chris Dodd, and Barney Frank standing together in support of legislation provokes my gag reflex.
Richard B. writes:
Tom Tancredo voted in favor of the bill.
Mary writes:
Thucydides wrote:
“As we speak, new bad paper is being created every day and shoved to or through Fannie and Freddie.”
Which entities are still creating this bad paper and how does Thucydides know this? I’m really interested to know.
Thucydides writes:
There is no mystery about this. All mortgage originators, including mortgage companies, banks, and savings and loans, are able to make the same subprime and so-called “Alt-A” substandard loans that they previously did. They can also make the same loans with low initial optional payment terms or adjustable rates that can prove a trap for over-extended borrowers that they previously could. I have seen no report that Fannie or Freddie (known as Government Sponsored Enterprises—GSEs) have changed their criteria for issuing guarantees on such mortgages. These GSEs some years ago expanded their activities to include not only issuing guarantees, but purchasing and holding their own previously guaranteed paper. This created the market that fueled demand for low grade mortgages. It also greatly increased the reported profit, given the spread between their low, implicitly Treasury-guaranteed borrowing costs, and the yield on this paper. This was the basis of the huge salaries and bonuses paid to their executives. The GSEs continue to purchase such paper, and have been encouraged to do so to try to hold up housing values. [LA replies: But Fannie (and Freddie) was placed under conservatorship on September 7. The same Wikipedia article starts off by saying that Fannie WAS a government sponsored enterprise (GSE), clearly implying that when it went under conservatorship, it ceased being a GSE. In this new status, can Fannie continue to back up mortgage originators as before? ]
The mortgage originators are in the business of originating mortgages; that is how they make their money. Why would they stop doing what they have been doing? The problem in this whole mess has been to divorce the credit originators, who after they sell the mortgages they originate, are out of the picture, from any consequences of default.
Why would your correspondent assume that anything had changed? [LA replies: she might assume it because the GSEs were placed under conservatorship of the federal government three weeks ago.] I suppose she simply cannot believe that such a situation would be permitted to continue. Certainly the Democrats in Congress are adamantly opposed to any restrictions on the GSEs because this would affect “affordable housing.” Accordingly, there were no restrictions in the package, but even still, many Democrats opposed it because it did not include new concessions, for example, allowing bankruptcy judges to wipe out the security of mortgages.
A different model was possible, which has been used in some cases, especially in Europe. Mortgages are pooled and securitized (shares sold to investors). However, the originator remains on the hook, and if the mortgage goes bad, must buy it back out of the pool. But our goal was different; it was to pump out huge amounts of credit to low-end borrowers in the hope they could somehow repay. It worked as long as home values were inflating (largely due to this cheap credit!) and upward resets of initial cheap rates could be covered with profits taken in a refinancing. When values stalled, the party was over.
Thucydides replies:
Here is from the statement of James Lockhart, Director of the Federal Housing Finance Agency [which took over Fannie and Freddie], on announcing the conservatorship:
There are several key components of this conservatorship:
First, Monday morning the businesses will open as normal, only with stronger backing for the holders of MBS, senior debt and subordinated debt.
Second, the Enterprises will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month without capital constraints.
Third, as the conservator, FHFA will assume the power of the Board and management.
Fourth, the present CEOs will be leaving, but we have asked them to stay on to help with the transition.
Thucydides continues:
The “conservatorship” (they didn’t want to use the term receivership which implies insolvency and perhaps cessation of operations) was simply removal of the old management and putting new people in charge. The mission of “providing liquidity to housing and mortgage markets” continues. See this announcement from the Fannie Mae website.
It is still in business, it still has publicly traded shares outstanding, though much reduced in value due in part the Treasury taking warrants for almost 80 percent of the equity, and it is regularly borrowing. Apart from the private equity holders being all but wiped out, to my knowledge nothing has changed in respect of the operations I outlined. It is still a GSE, to the extent that term is understood to mean that its borrowings carry an implicit guarantee of the U.S. Treasury.
September 30
Rhona writes:
I find it fascinating and dishonest to observe how the mainstream media is portraying the votes on the bailout package. Ninety five Democrats voted against the package (40 percent). That’s a substantial amount in a Democratic-controlled Congress. What is most interesting, though, is that when you break down the Democrats who voted against the package, you see that virtually all (and perhaps all) of the black and Hispanic legislators voted nay. What are their objections? That they’re not getting enough pork? That they hate rich white businessmen? We get no sense from the media (who love these people) as to what their problems are. I surely would like to know.
Instead, what we get is the drumbeat of attacks on “stiff-backed ideological” Republicans who are sticking with their rigid positions to the detriment of the country. You means those on the left are not hurting the country too by voting no? Now I personally would like the bill to pass with strong protections in place against the predatory left, but a true analysis would take into account positions on both sides. What we have instead is a mainstream media (largely in favor of the bill) seeking to cast exclusive blame on people whom they hate.
The media bias never ends.
Posted by Lawrence Auster at September 29, 2008 03:43 PM | Send