What Killed It?

So, what killed the $700 billion dollar bail out for the second time in 4 days? The same thing that shot it down last week. Too much government control of the markets in the plan. Toss in a healthy dose of voter sentiment against the plan and it was ripe to die.

The Republicans who wanted less government buying of bad debt, and more government insuring of companies who would buy it won again. At this moment a lot of folks are saying it's a losing day for everyone, I disagree. I think that the American taxpayer came out ahead by this getting defeated.

A great sidenote to this, the folks who've been commenting on my other bailout posts who claimed the GOP couldn't have tried to fix this in 2003 and 2005, because they controlled Congress should be taking note. Nancy Pelosi stood up and told her troops, who control Congress, that this HAD to pass, and it didn't. Even with a majority, and the leader wanting something, it doesn't always pass. 40% of House Democrats bolted and voted against the plan.

One congressman noted last week that his phone calls about the bailout were running 50/50. 50% saying "No", the other 50% saying "HELL NO!". So, if nothing else, it seems that occasionally our representative government actually does what the people want, which evidently wasn't a huge bailout of Wall St. with their money.

All the news isn't bad though. With this huge drop in the market so close to the end of the month, the 40% of my retirement fund that I moved to purchasing of index funds in August should do quite well when they buy tomorrow. Since I'm not planning on retiring for 20 or so years, they have plenty of time to move back up to the range that will make me comfortable at 65. Buy low sell high works quite well.

To finish this off, here's a great YouTube video of a 2004 Congressional hearing, where Freddie Mac and Fannie Mae's practices and leaders are praised by Democrats, and Republicans beg for some oversight.

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The Bailout

Okay, so we are now looking at spending $700 BILLION to bail out failing financial institutions due to the mortgage crisis.

One of the Barack Obama talking points is how the current administration has been asleep at the wheel and allowed this to happen. Actually, if Mr. Obama would do a little Google searching, or just read Mac Ranger's blog, he's know that it's Congressional Democrats who allowed this to fester to the point of a melt down.

Mac does impeccable research, and he dug up a 2003 article from the NY Times about a proposal by President Bush to create an oversight agency for Freddie Mac and Fannie Mae.

If you go click on my site meter you'll find at least 4 hits per day, some days many more of people searching for "Barney Frank Bailout", that would be Congressional Democrat Barney Frank of Massachusetts, who in the article from 2003 said there was no problem with Freddie and Fannie:

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

In March of this year, Rep. Frank came up with his own mortgage bailout plan, to help the people affected by the problems at Freddie and Fannie, and the general lack of oversight in the mortgage industry.

As history is showing us Republicans have been on the ball in the mortgage crisis for 5 years, and didn't just try one time to reform things.

In 2005 Chuck Hagel introduced S.190, "Federal Housing Enterprise Regulatory Reform Act of 2005", which would also have established oversite of Freddie and Fannie, and set capital reserve levels for them to maintain that would have prevented a large part of this crisis. It never made it out of committee, had it Senate Democrats would have killed it on the floor.

So why were the Democrats so against the idea of reform, when it's been obvious for 5 or more years that there was an issue? Simply put, fixing the mortgage process would have probably made it harder for low income people, one of their key constituencies, to game the system and buy homes. Frank said as much in the 2003 quote above.

The problem is that a lot of those people who were looking for "affordable housing" ended up with loans that went bad when they became unaffordable. The system allowed them to buy more than they could afford through ARM's and balloon loans.

They are no longer in their homes, and have had their credit ruined. The same folks who wouldn't allow reforms that might have prevented such things are now telling them, as always, that it's somebody elses fault.

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Bailing Out The Banks

Congress passed the "mortgage rescue" bill that will help 400,000 home owners, but is really a benefit for banks and Freddie Mac and Fannie Mae.

Unfortunately the President doesn't have the guts to veto it, due to the bad publicity he'd get for it, and that would go to the GOP during an election cycle.

The bill is definitely a contradiction. On one hand 400,000 "at risk" home owners could get bailed out IF their banks are willing to take a loss on their loans and refinance them through FHA. If everyone takes that deal, taxpayers are on the hook for 300 BILLION dollars in new loan guarantees.

However, the bill also gives nearly 4 billion in grants to banks to rehab foreclosed properties to get them ready to sell. In other words, the bank gets two choices, take a loss and refinance, or get a grant after foreclosure to repair the house and resell it; hopefully at less of a loss.

The block grants, opposed by Bush and the GOP are an issue. Banks generally stay out of the real estate business as much as possible. In most cases, when possible, they'd rather work out a short sale, or refinance instead of foreclosing so they don't have to deal with the inevitable problems associated with holding a home. This bill gives them as much an incentive to foreclose as it does to refinance, possibly more since the government is willing to mitigate part of their loss under the block grant program.

Freddie and Fannie also get sweet deals, with the Federal Reserve being able to loan them basically unlimited amounts of money over the next 18 months to help shore up their poor loan portfolios. Yes, they get some extra oversight (finally), and have to pay for some new programs, but on the whole, it's a big wet kiss for getting in over their heads with risky loans.

Who loses in the bill? The tax payers, that's who. We get put on the hook for hundreds of billions in new loans through FHA, and hundreds more by tossing cash at Freddie and Fannie. While Congress sees this as "doing their job" the truth is both the GOP lead congress and the one run by Democrats fell down on their jobs by not having some of the new protections in place previously. They were too busy rolling around in the cash that was coming in from a housing driven economy to look at how wobbly the foundation was.

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