Los Angeles Personal Injury Lawyer - Congress

Paul Krugman is on the Edge

Paul Kiesel — Fri, 06 Feb 2009 19:53:48 GMT

As the economy remains stagnant or contracts into a more depressing declivity, reports of the number of job losses from January coming in and continuing to rise (600,000 and counting; not to mention the 200,000 state workers in California who didn't work today), and a Republican Congress hell-bent on an "insurgency," here (below) is an article that compliments and captures the sentiments most people in this country currently feel.

On the Edge by Paul Krugman

A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.

It’s as if the dismal economic failure of the last eight years never happened — yet Democrats have, incredibly, been on the defensive. Even if a major stimulus bill does pass the Senate, there’s a real risk that important parts of the original plan, especially aid to state and local governments, will have been emasculated.

Somehow, Washington has lost any sense of what’s at stake — of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.

It’s hard to exaggerate how much economic trouble we’re in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world.

Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, since they aren’t selling enough to use the capacity they have. And exports, which were one of the U.S. economy’s few areas of strength over the past couple of years, are now plunging as the financial crisis hits our trading partners.

Meanwhile, our main line of defense against recessions — the Federal Reserve’s usual ability to support the economy by cutting interest rates — has already been overrun. The Fed has cut the rates it controls basically to zero, yet the economy is still in free fall.

It’s no wonder, then, that most economic forecasts warn that in the absence of government action we’re headed for a deep, prolonged slump. Some private analysts predict double-digit unemployment. The Congressional Budget Office is slightly more sanguine, but its director, nonetheless, recently warned that “absent a change in fiscal policy ... the shortfall in the nation’s output relative to potential levels will be the largest — in duration and depth — since the Depression of the 1930s.”

Worst of all is the possibility that the economy will, as it did in the ’30s, end up stuck in a prolonged deflationary trap.

We’re already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if the economy continues to weaken.

As the great American economist Irving Fisher pointed out almost 80 years ago, deflation, once started, tends to feed on itself. As dollar incomes fall in the face of a depressed economy, the burden of debt becomes harder to bear, while the expectation of further price declines discourages investment spending. These effects of deflation depress the economy further, which leads to more deflation, and so on.

And deflationary traps can go on for a long time. Japan experienced a “lost decade” of deflation and stagnation in the 1990s — and the only thing that let Japan escape from its trap was a global boom that boosted the nation’s exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time?

Would the Obama economic plan, if enacted, ensure that America won’t have its own lost decade? Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger. But the Obama plan would certainly improve our odds. And that’s why the efforts of Republicans to make the plan smaller and less effective — to turn it into little more than another round of Bush-style tax cuts — are so destructive.

So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.

It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.

Originally posted at InjuryBoard by Paul Kiesel

Bush and the Economy or Beating a Dead Horse

Paul Kiesel — Tue, 23 Dec 2008 19:20:47 GMT

The New York Times published an article Sunday that broadly examines President Bush's role in our current economic turmoil (how Mr. Bush and his administration held the country's hand and led us down this disatrous and failed economic path).

The article is well written and very informative, however, it oversimplifies the problem and fulfills the desire of providing a face to the problem, which, in many instances, the general population craves in order to "justifiably" place blame: Mr. Bush's and the Bush administration's failed domestic/economic policy brought us to the economic plights of 2008. There is more substance to the country's economic problem than that simplified thesis (and I may have even simplified the thesis of the Times article, incidentally), more because, as we'll shortly see, once Mr. Bush leaves office, the economic turmoil will persist well into 2010.

If one chooses to research the matter further (or has the time to browse through any one of my blogs from May-July, 2008, maybe even using the Times article as a jumping-off point), he or she will quickly discover that Mr. Bush and his administration's ignorance exacerbated the problem, but that it was propelled long ago in securities deregulation legislation.

Below is the aforementioned New York Times article:

The Reckoning

White House Philosophy Stoked Mortgage Bonfire

By JO BECKER, SHERYL GAY STOLBERG and STEPHEN LABATON

“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” — President Bush, Oct. 15, 2002

WASHINGTON — The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, “scared the hell out of everybody.”

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group.

The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.

Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.

Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

“How,” he wondered aloud, “did we get here?”

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

“There is no question we did not recognize the severity of the problems,” said Al Hubbard, Mr. Bush’s former chief economics adviser, who left the White House in December 2007. “Had we, we would have attacked them.”

Looking back, Keith B. Hennessey, Mr. Bush’s current chief economics adviser, says he and his colleagues did the best they could “with the information we had at the time.” But Mr. Hennessey did say he regretted that the administration did not pay more heed to the dangers of easy lending practices. And both Mr. Paulson and his predecessor, John W. Snow, say the housing push went too far.

“The Bush administration took a lot of pride that homeownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security. The housing market was a bright spot: ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.

Lawrence B. Lindsey, Mr. Bush’s first chief economics adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.

“No one wanted to stop that bubble,” Mr. Lindsey said. “It would have conflicted with the president’s own policies.”

Today, millions of Americans are facing foreclosure, homeownership rates are virtually no higher than when Mr. Bush took office, Fannie and Freddie are in a government conservatorship, and the bailout cost to taxpayers could run in the trillions.

As the economy has shed jobs — 533,000 last month alone — and his party has been punished by irate voters, the weakened president has granted his Treasury secretary extraordinary leeway in managing the crisis.

Never once, Mr. Paulson said in a recent interview, has Mr. Bush overruled him. “I’ve got a boss,” he explained, who “understands that when you’re dealing with something as unprecedented and fast-moving as this we need to have a different operating style.”

Mr. Paulson and other senior advisers to Mr. Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. “There is not any playbook,” Mr. Paulson said.

The president declined to be interviewed for this article. But in recent weeks Mr. Bush has shared his views of how the nation came to the brink of economic disaster. He cites corporate greed and market excesses fueled by a flood of foreign cash — “Wall Street got drunk,” he has said — and the policies of past administrations. He blames Congress for failing to reform Fannie and Freddie. Last week, Fox News asked Mr. Bush if he was worried about being the Herbert Hoover of the 21st century.

“No,” Mr. Bush replied. “I will be known as somebody who saw a problem and put the chips on the table to prevent the economy from collapsing.”

But in private moments, aides say, the president is looking inward. During a recent ride aboard Marine One, the presidential helicopter, Mr. Bush sounded a reflective note.

“We absolutely wanted to increase homeownership,” Tony Fratto, his deputy press secretary, recalled him saying. “But we never wanted lenders to make bad decisions.”

A Policy Gone Awry

Darrin West could not believe it. The president of the United States was standing in his living room.

It was June 17, 2002, a day Mr. West recalls as “the highlight of my life.” Mr. Bush, in Atlanta to unveil a plan to increase the number of minority homeowners by 5.5 million, was touring Park Place South, a development of starter homes in a neighborhood once marked by blight and crime.

Mr. West had patrolled there as a police officer, and now he was the proud owner of a $130,000 town house, bought with an adjustable-rate mortgage and a $20,000 government loan as his down payment — just the sort of creative public-private financing Mr. Bush was promoting.

“Part of economic security,” Mr. Bush declared that day, “is owning your own home.”

A lot has changed since then. Mr. West, beset by personal problems, left Atlanta. Unable to sell his home for what he owed, he said, he gave it back to the bank last year. Like other communities across America, Park Place South has been hit with a foreclosure crisis affecting at least 10 percent of its 232 homes, according to Masharn Wilson, a developer who led Mr. Bush’s tour.

“I just don’t think what he envisioned was actually carried out,” she said.

Park Place South is, in microcosm, the story of a well-intentioned policy gone awry. Advocating homeownership is hardly novel; the Clinton administration did it, too. For Mr. Bush, it was part of his vision of an “ownership society,” in which Americans would rely less on the government for health care, retirement and shelter. It was also good politics, a way to court black and Hispanic voters.

But for much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”

But Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.

Like Minds on Laissez-Faire

The president’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general’s report.

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.

In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Mr. Bush’s re-election campaign, more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics. The administration did not finalize the new rules until last month.

Among the Republican Party’s top 10 donors in 2004 was Roland Arnall. He founded Ameriquest, then the nation’s largest lender in the subprime market, which focuses on less creditworthy borrowers. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread.

Andrew H. Card Jr., Mr. Bush’s former chief of staff, said White House aides discussed Ameriquest’s troubles, though not what they might portend for the economy. Mr. Bush had just nominated Mr. Arnall as his ambassador to the Netherlands, and the White House was primarily concerned with making sure he would be confirmed.

“Maybe I was asleep at the switch,” Mr. Card said in an interview.

Brian Montgomery, the Federal Housing Administration commissioner, understood the significance. His agency insures home loans, traditionally for the same low-income minority borrowers Mr. Bush wanted to help. When he arrived in June 2005, he was shocked to find those customers had been lured away by the “fool’s gold” of subprime loans. The Ameriquest settlement, he said, reinforced his concern that the industry was exploiting borrowers.

In December 2005, Mr. Montgomery drafted a memo and brought it to the White House. “I don’t think this is what the president had in mind here,” he recalled telling Ryan Streeter, then the president’s chief housing policy analyst.

It was an opportunity to address the risky subprime lending practices head on. But that was never seriously discussed. More senior aides, like Karl Rove, Mr. Bush’s chief political strategist, were wary of overly regulating an industry that, Mr. Rove said in an interview, provided “a valuable service to people who could not otherwise get credit.” While he had some concerns about the industry’s practices, he said, “it did provide an opportunity for people, a lot of whom are still in their houses today.”

The White House pursued a narrower plan offered by Mr. Montgomery that would have allowed the F.H.A. to loosen standards so it could lure back subprime borrowers by insuring similar, but safer, loans. It passed the House but died in the Senate, where Republican senators feared that the agency would merely be mimicking the private sector’s risky practices — a view Mr. Rove said he shared.

Looking back at the episode, Mr. Montgomery broke down in tears. While he acknowledged that the bill did not get to the root of the problem, he said he would “go to my grave believing” that at least some homeowners might have been spared foreclosure.

Today, administration officials say it is fair to ask whether Mr. Bush’s ownership push backfired. Mr. Paulson said the administration, like others before it, “over-incented housing.” Mr. Hennessey put it this way: “I would not say too much emphasis on expanding homeownership. I would say not enough early focus on easy lending practices.”

‘We Told You So’

Armando Falcon Jr. was preparing to take on a couple of giants.

A soft-spoken Texan, Mr. Falcon ran the Office of Federal Housing Enterprise Oversight, a tiny government agency that oversaw Fannie Mae and Freddie Mac, two pillars of the American housing industry. In February 2003, he was finishing a blockbuster report that warned the pillars could crumble.

Created by Congress, Fannie and Freddie — called G.S.E.’s, for government-sponsored entities — bought trillions of dollars’ worth of mortgages to hold or sell to investors as guaranteed securities. The companies were also Washington powerhouses, stuffing lawmakers’ campaign coffers and hiring bare-knuckled lobbyists.

Mr. Falcon’s report outlined a worst-case situation in which Fannie and Freddie could default on debt, setting off “contagious illiquidity in the market” — in other words, a financial meltdown. He also raised red flags about the companies’ soaring use of derivatives, the complex financial instruments that economic experts now blame for spreading the housing collapse.

Today, the White House cites that report — and its subsequent effort to better regulate Fannie and Freddie — as evidence that it foresaw the crisis and tried to avert it. Bush officials recently wrote up a talking points memo headlined “G.S.E.’s — We Told You So.”

But the back story is more complicated. To begin with, on the day Mr. Falcon issued his report, the White House tried to fire him.

At the time, Fannie and Freddie were allies in the president’s quest to drive up homeownership rates; Franklin D. Raines, then Fannie’s chief executive, has fond memories of visiting Mr. Bush in the Oval Office and flying aboard Air Force One to a housing event. “They loved us,” he said.

So when Mr. Falcon refused to deep-six his report, Mr. Raines took his complaints to top Treasury officials and the White House. “I’m going to do what I need to do to defend my company and my position,” Mr. Raines told Mr. Falcon.

Days later, as Mr. Falcon was in New York preparing to deliver a speech about his findings, his cellphone rang. It was the White House personnel office, he said, telling him he was about to be unemployed.

His warnings were buried in the next day’s news coverage, trumped by the White House announcement that Mr. Bush would replace Mr. Falcon, a Democrat appointed by Bill Clinton, with Mark C. Brickell, a leader in the derivatives industry that Mr. Falcon’s report had flagged.

It was not until 2003, when Freddie became embroiled in an accounting scandal, that the White House took on the companies in earnest. Mr. Bush decided to quit the long-standing practice of rewarding supporters with high-paying appointments to the companies’ boards — “political plums,” in Mr. Rove’s words. He also withdrew Mr. Brickell’s nomination and threw his support behind Mr. Falcon, beginning an intense effort to give his little regulatory agency more power.

Mr. Falcon lacked explicit authority to limit the size of the companies’ mammoth investment portfolios, or tell them how much capital they needed to guard against losses. White House officials wanted that to change. They also wanted the power to put the companies into receivership, hoping that would end what Mr. Card, the former chief of staff, called “the myth of government backing,” which gave the companies a competitive edge because investors assumed the government would not let them fail.

By the spring of 2005 a deal with Congress seemed within reach, Mr. Snow, the former Treasury secretary, said in an interview.

Michael G. Oxley, an Ohio Republican and then-chairman of the House Financial Services Committee, had produced what Mr. Snow viewed as “a pretty darned good bill,” a watered-down version of what the president sought. But at the urging of Mr. Card and the White House economics team, the president decided to hold out for a tougher bill in the Senate.

Mr. Card said he feared that Mr. Snow was “more interested in the deal than the result.” When the bill passed the House, the president issued a statement opposing it, effectively killing any chance of compromise. Mr. Oxley was furious.

“The problem with those guys at the White House, they had all the answers and they didn’t think they had to listen to anyone, including the Treasury secretary,” Mr. Oxley said in a recent interview. “They were driving the ideological train. He was in the caboose, and they were in the engine room.”

Mr. Card and Mr. Hennessey said they had no regrets. They are convinced, Mr. Hennessey said, that the Oxley bill would have produced “the worst of all possible outcomes,” the illusion of reform without the substance.

Still, some former White House and Treasury officials continue to debate whether Mr. Bush’s all-or-nothing approach scuttled a measure that, while imperfect, might have given an aggressive regulator enough power to keep the companies from failing.

Mr. Snow, for one, calls Mr. Oxley “a hero,” adding, “He saw the need to move. It didn’t get done. And it’s too bad, because I think if it had, I think we could well have avoided a big contributor to the current crisis.”

Unheeded Warnings

Jason Thomas had a nagging feeling.

The New Century Financial Corporation, a huge subprime lender whose mortgages were bundled into securities sold around the world, was headed for bankruptcy in March 2007. Mr. Thomas, an economic analyst for President Bush, was responsible for determining whether it was a hint of things to come.

At 29, Mr. Thomas had followed a fast-track career path that took him from a Buffalo meatpacking plant, where he worked as a statistician, to the White House. He was seen as a whiz kid, “a brilliant guy,” his former boss, Mr. Hubbard, says.

As Mr. Thomas began digging into New Century’s failure that spring, he became fixated on a particular statistic, the rent-to-own ratio.

Typically, as home prices increase, rental costs rise proportionally. But Mr. Thomas sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Mr. Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

It was not the Bush team’s first warning. The previous year, Mr. Lindsey, the former chief economics adviser, returned to the White House to tell his old colleagues that housing prices were headed for a crash. But housing values are hard to evaluate, and Mr. Lindsey had a reputation as a market pessimist, said Mr. Hubbard, adding, “I thought, ‘He’s always a bear.’ ”

In retrospect, Mr. Hubbard said, Mr. Lindsey was “absolutely right,” and Mr. Thomas’s charts “should have been a signal.”

Instead, the prevailing view at the White House was that the problems in the housing market were limited to subprime borrowers unable to make their payments as their adjustable mortgages reset to higher rates. That belief was shared by Mr. Bush’s new Treasury secretary, Mr. Paulson.

Mr. Paulson, a former chairman of the Wall Street firm Goldman Sachs, had been given unusual power; he had accepted the job only after the president guaranteed him that Treasury, not the White House, would have the dominant role in shaping economic policy. That shift merely continued an imbalance of power that stifled robust policy debate, several former Bush aides say.

Throughout the spring of 2007, Mr. Paulson declared that “the housing market is at or near the bottom,” with the problem “largely contained.” That position underscored nearly every action the Bush administration took in the ensuing months as it offered one limited response after another.

By that August, the problems had spread beyond New Century. Credit was tightening, amid questions about how heavily banks were invested in securities linked to mortgages. Still, Mr. Bush predicted that the turmoil would resolve itself with a “soft landing.”

The plan Mr. Bush announced on Aug. 31 reflected that belief. Called “F.H.A. Secure,” it aimed to help about 80,000 homeowners refinance their loans. Mr. Montgomery, the housing commissioner, said that he knew the modest program was not enough — the White House later expanded the agency’s rescue role — and that he would be “flying the plane and fixing it at the same time.”

That fall, Representative Rahm Emanuel, a leading Democrat, former investment banker and now the incoming chief of staff to President-elect Barack Obama, warned the White House it was not doing enough. He said he told Joshua B. Bolten, Mr. Bush’s chief of staff, and Mr. Paulson in a series of phone calls that the credit crisis would get “deep and serious” and that the only answer was big, internationally coordinated government intervention.

“You got to strangle this thing and suffocate it,” he recalled saying.

Instead, Mr. Bush developed Hope Now, a voluntary public-private partnership to help struggling homeowners refinance loans. And he worked with Congress to pass a stimulus package that sent taxpayers $150 billion in tax rebates.

In a speech to the Economic Club of New York in March 2008, he cautioned against Washington’s temptation “to say that anything short of a massive government intervention in the housing market amounts to inaction,” adding that government action could make it harder for the markets to recover.

Dominoes Start to Fall

Within days, Bear Sterns collapsed, prompting the Federal Reserve to engineer a hasty sale. Some economic experts, including Timothy F. Geithner, the president of the New York Federal Reserve Bank (and Mr. Obama’s choice for Treasury secretary) feared that Fannie Mae and Freddie Mac could be the next to fall.

Mr. Bush was still leaning on Congress to revamp the tiny agency that oversaw the two companies, and had acceded to Mr. Paulson’s request for the negotiating room that he had denied Mr. Snow. Still, there was no deal.

Over the previous two years, the White House had effectively set the agency adrift. Mr. Falcon left in 2005 and was replaced by a temporary director, who was in turn replaced by James B. Lockhart, a friend of Mr. Bush from their days at Andover, and a former deputy commissioner of the Social Security Administration who had once run a software company.

On Mr. Lockhart’s watch, both Freddie and Fannie had plunged into the riskiest part of the market, gobbling up more than $400 billion in subprime and other alternative mortgages. With the companies on precarious footing, Mr. Geithner had been advocating that the administration seize them or take other steps to reassure the market that the government would back their debt, according to two people with direct knowledge of his views.

In an Oval Office meeting on March 17, however, Mr. Paulson barely mentioned the idea, according to several people present. He wanted to use the troubled companies to unlock the frozen credit market by allowing Fannie and Freddie to buy more mortgage-backed securities from overburdened banks. To that end, Mr. Lockhart’s office planned to lift restraints on the companies’ huge portfolios — a decision derided by former White House and Treasury officials who had worked so hard to limit them.

But Mr. Paulson told Mr. Bush the companies would shore themselves up later by raising more capital.

“Can they?” Mr. Bush asked.

“We’re hoping so,” the Treasury secretary replied.

That turned out to be incorrect, and did not surprise Mr. Thomas, the Bush economic adviser. Throughout that spring and summer, he warned the White House and Treasury that, in the stark words of one e-mail message, “Freddie Mac is in trouble.” And Mr. Lockhart, he charged, was allowing the company to cover up its insolvency with dubious accounting maneuvers.

But Mr. Lockhart continued to offer reassurances. In a July appearance on CNBC, he declared that the companies were well managed and “worsts were not coming to worst.” An infuriated Mr. Thomas sent a fresh round of e-mail messages accusing Mr. Lockhart of “pimping for the stock prices of the undercapitalized firms he regulates.”

Mr. Lockhart defended himself, insisting in an interview that he was aware of the companies’ vulnerabilities, but did not want to rattle markets.

“A regulator,” he said, “does not air dirty laundry in public.”

Soon afterward, the companies’ stocks lost half their value in a single day, prompting Congress to quickly give Mr. Paulson the power to spend $200 billion to prop them up and to finally pass Mr. Bush’s long-sought reform bill, but it was too late. In September, the government seized control of Freddie Mac and Fannie Mae.

In an interview, Mr. Paulson said the administration had no justification to take over the companies any sooner. But Mr. Falcon disagreed: “They absolutely could have if they had thought there was a real danger.”

By Sept. 18, when Mr. Bush and his team had their fateful meeting in the Roosevelt Room after the failure of Lehman Brothers and the emergency rescue of A.I.G., Mr. Paulson was warning of an economic calamity greater than the Great Depression. Suddenly, historic government intervention seemed the only option. When Mr. Paulson spelled out what would become a $700 billion plan to rescue the nation’s banking system, the president did not hesitate.

“Is that enough?” Mr. Bush asked.

“It’s a lot,” the Treasury secretary recalled replying. “It will make a difference.” And in any event, he told Mr. Bush, “I don’t think we can get more.”

As the meeting wrapped up, a handful of aides retreated to the White House Situation Room to call Vice President Dick Cheney in Florida, where he was attending a fund-raiser. Mr. Cheney had long played a leading role in economic policy, though housing was not a primary interest, and like Mr. Bush he had a deep aversion to government intervention in the market. Nonetheless, he backed the bailout, convinced that too many Americans would suffer if Washington did nothing.

Mr. Bush typically darts out of such meetings quickly. But this time, he lingered, patting people on the back and trying to soothe his downcast staff. “During times of adversity, he bucks everybody up,” Mr. Paulson said.

It was not the end of the failures or government interventions; the administration has since stepped in to rescue Citigroup and, just last week, the Detroit automakers. With 31 days left in office, Mr. Bush says he will leave it to historians to analyze “what went right and what went wrong,” as he put it in a speech last week to the American Enterprise Institute.

Mr. Bush said he was too focused on the present to do much looking back.

“It turns out,” he said, “this isn’t one of the presidencies where you ride off into the sunset, you know, kind of waving goodbye.”

Originally posted at InjuryBoard by Paul Kiesel

Interim Head of Government Bailouts, Neel Kashkari, Called a "Chump" by One Congressman, While Another Compares Him to Mel Gibson

Paul Kiesel — Fri, 14 Nov 2008 19:09:16 GMT

Neel Kashkari, the interim head of the Troubled Asset Relief Program (aka the Treasury Department's $700 billion financial rescue plan or TARP), came under heavy fire today at a House Oversight and Government Reform subcommittee hearing, after Maryland Democrat Elijah Cummings got his chance to ask Kashkari questions relating to an expanded $154 billion that was given to American International Group Inc. (AIG) this week, even though AIG still plans on setting aside $503 million in compensation for executives.

Cummings asked Kashkari, "I'm just wondering how you feel about an AIG giving $503 million worth of bonuses on the one hand, and accepting $154 billion from hard-working taxpayers? [And] what really bothers me is all these other people lining up. They say, well, is Kashkari a chump?"

Kashkari responded by telling the panel he was "outraged" that AIG will do this, but he then said he recently learned that AIG has set aside money in order to eliminate an incentive to leave the insurer.

"I'm not defending it," Kashkari said. But, in actuality, he had done just that.

After Cummings prodded Kashkari further, and laid a minor guilt-trip on him, explaining that families, due to the economic situations that many in the country currently face, will "probably be sitting under the Christmas tree with no presents" this year due to his decisions inadvertently determining consumer behavior, Dennis Kucinich, the chairman of this subcommittee, repeatedly interrupted the Treasury official during the more than two-hour session.

Kucinich harshly criticized Treasury Secretary Henry Paulson's decision this week to abandon the TARP's original intent of purchasing toxic mortgage assets from financial firms.

"The secretary just essentially took some scissors and cut it out and threw it away [. . .] Maybe this is some kind of game to some people in the administration," Kucinich said. "They're [Bush's Administration] on their way out of office and they just feel they can do whatever they want."

Is Kashkari a Chump

Kashkari reitterated to the subcommittee that his department isn't in charge of bank oversight, and that financial regulators are more concerned with bank using this capital to increase lending.

The top Republican on the subcommittee, Darell Issa (R-CA), chided Kashkari saying that his efforts have done little to help families stay in their homes. "It's very clear that the Treasury cannot and will not make the effort to keep people in their homes."

After further accusations by some other members of the committee, California Republican Brian Bilbray, with an absurd veneration, compared Kashkari to Mel Gibson's character from Braveheart, "I guess you sort of got a taste of how Mel Gibson felt in the last scenes of 'Braveheart' [. . .] You're probably the best spokesman the administration has [and] you've come across with more credibility than anyone else that I've heard."

Originally posted at InjuryBoard by Paul Kiesel

Rep. Barney Frank: No "Free Rides" for People Facing Foreclosures

Paul Kiesel — Thu, 13 Nov 2008 16:22:00 GMT

House Committee on Financial Services Chairman Barney Frank noted yesterday that a bailout program for troubled homeowners is needed to prevent the foreclosure crisis from spinning out of control. However, he also emphasized that not all borrowers should be rescued.

"Diminishing foreclosures is an important part of getting out of this [crisis]," Rep. Frank said in an opening statement at a Congressional hearing focused on what banks were doing to modify loans and further assist borrowers facing foreclosure, while adding that taxpayer money should not provide a "free ride" to people facing foreclosure, and warned that aid should not go to homeowners who should have never been in a mortgage to begin with.

"There is, in my judgment, zero likelihood that taxpayer dollars will go to those who should have never have had loans in the first place," Rep. Frank said.

Banks, like Bank of America, Citigroup and JP Morgan Chase, have started programs to modify loans for borrowers that are in danger of being foreclosed on. However, all of the programs have certain criteria that need to be met in order for a borrower to qualify (i.e. being in default; which is problematic because it could encourage frustrated borrowers who are in underwater mortgages, and who are not behind on their payments, to default in order to receive a loan modification) and the loan modification programs also appear to be overly streamlined, so it remains to be seen if the loan modification programs being offered by the banks will provide desirable results.

And even with the banks tackling the foreclosure crisis with their own loan modification programs, Mark Zandi, chief economist for Moody's Economy.com, estimates that 1.6 million Americans will lose their homes this year through foreclosure or distressed sale. Zandi, who was not at Rep. Frank's hearing, has also stressed for the past year (at least since December 2007) that another 1.9 million families will their homes in 2009, regardless of wide-scale loan modification programs.

Originally posted at InjuryBoard by Paul Kiesel

Downey Savings: We Need a Cash Infusion

Paul Kiesel — Wed, 12 Nov 2008 20:58:22 GMT

Downey Savings might be the next bank to require government intervention (i.e. see FDIC IndyMac), as its most recent quarterly filing cites a "significant risk that the bank will not be able to raise sufficient additional capital to ensure compliance with the capital requirements of the bank consent order by yearend." Meaning: if Downey does indeed fail, it'll be put into federal receivership (what the FDIC did on July 11, 2008 to IndyMac).

The main reason Downey Savings finds itself in this predicament: "Of the bank’s $12.8 billion in total assets, $5.7 billion were in the form of option ARMs held in portfolio at the end of the third quarter; deposits totaled just $9.6 billion at quarter end, down $1 billion from one year ago, as depositors withdrew funds over concerns about the bank’s future," (HousingWire.com, 11/12/08).

And if Downey is struggling that badly in its current financial state due to the amount of toxic option ARM loans it has on its balance sheet, wait till the other batch of option ARMs that were originated in 2007 have interest rate resets. These interest rate resets are predicated on: 1. The loans being negative amortizing; 2. The interest that's not being paid is compounded (this is typical of Pick-a-Pay Option ARM Loans; Downey carelessly sold many of these loans to Californians), which forces the loan to reset its interest rate the moment the principal balance reaches 110% of the original amount (sometimes 115%); 3. The next wave of interest rate resets are taking slightly longer to occur then the first wave, because the fed has been lowering interest rates, thus, the second set of option ARM loan interest rate resets might not occur till mid-2009.

However, if banks like Downey are able to modify a borrower's loan terms, and take a short-term hit, in hopes of preventing a potentially worse sequel to the current mortgage mess, then they might be able to make it out of this with their heads above water. If not, banks like Downey will continue to struggle with satisfying regulator-mandated capital requirements, with the exception of a cash infusion from another party.

Downey has yet to announce plans of a loan modification program, thereby finding itself ostensibly driving down the same bumpy road that IndyMac was recklessly swerving down back in the spring.

Originally posted at InjuryBoard by Paul Kiesel

Washington Mutual's Lending Operation: A Boiler Room Environment

Paul Kiesel — Tue, 04 Nov 2008 15:26:02 GMT

Yesterday, the New York Times reported on a senior mortgage underwriter who had, previous to the subprime and pay option ARM loan boom, been proud of her ability to spot fraud and other problems in loan applications.

Keysha Cooper said she found herself stuck between a rock and a hard place during the latter part of the mortgage boom, as brokers squeezed her from one side, her superiors, like the ones working under disgraced WaMu former CEO Kerry Killinger, pushing her from the other, with both sides pressuring her to approve loans, regardless.

Ms. Cooper told the Times, "At WaMu it wasn't about the quality of loans; it was about the numbers [. . .] They didn't care if we were giving loans to people that didn't qualify. Instead, it was how many loans did you guys close and fund?"

And what if Ms. Cooper didn't approve the loans that were coming through WaMu's doors? She and other mortgage underwriters were punished. The loan officers that were complicit with WaMu's irreverent regard to shareholders and whether or not borrowers could keep current with their payments: They received free trips to places like Hawaii and Jamaica... for a month!

Ms. Cooper was even placed on probation for a month for refusing to approve a loan, which she said was filled with so many discrepancies that is clearly was an example of mortgage fraud.

Why would Washington Mutual want to sell hundreds of thousands of these loans that mirrored or were explicitly deemed fraudulent to loan officers? Because surreptitiously placed throughout the loan documents were several hidden fees and/or penalties, which would result in $20,000 to $40,000 on a loan that was approximately $500,000. Thus, the more TILA violations in the loan, the more money WaMu could rake in.

Kerry Killinger, the recently ousted Chief Executive of this whole guerilla-like, Boiler Room environment, and the man who tops the list of defendants who are being sued by shareholders, should not only be held responsible in paying back the tens of millions of dollars he "pocketed" from Washington Mutual under his helm, but the topic of "prison" should also be thrown into the mix.

Originally posted at InjuryBoard by Paul Kiesel

JPMorgan Chase: 90 Day Foreclosure Moratorium

Paul Kiesel — Mon, 03 Nov 2008 20:10:08 GMT

JPMorgan Chase will not be putting any more homes into foreclosure over the next 90 days, as it comes up with a loan modification plan geared towards keeping borrowers in their homes.

In a press statement released on Friday, JPMorgan said that the modifications should impact as many as 400,000 borrowers, or approximately $70 billion in mortgages, and almost $55 billion will focus on option ARM loans that JPMorgan inherited after purchasing Washington Mutual and absorbing its "toxic loans."

JPMorgan will offer borrowers in payment option ARM loans alternatives such as 30-year, fixed-rate loans with affordable payments (principal deferral, interest-only payments for a specified period, etc.).

Even though it appears that JP Morgan Chase is: 1. Trying to mitigate its own losses by enacting this moratorium and 2. Wants to keep people in their homes, the company likely has ulterior motives; by going forward with this plan, at this current time, JPMorgan can avoid further market regulation surrounding its servicing practices. House Financial Services Committee chairman Barney Frank (D-MA) has been suggesting all throughout the mortgage crisis that lenders who fail to implement programs to modify loans or choose to ignore Congress' call to correct servicing practices will be subject to further regulation.

According to HousingWire.com, "With reports now surfacing that investors aren't willing to participate in the recently-legislated Hope for Homeowners -- as well as early reports suggesting that lenders are refusing to buy the loans, as well -- it's very possible that JPMorgan is trying to keep ahead of a potential political firestorm over the issue."

It's not clear if JPMorgan will be able to yield these proposed ambitious results (400,000 loan modifications within 90 days?), considering investors play a role in this whole process, but maybe they'll find more success than FDIC IndyMac, which, in comparison, has only modified about 4,500 loans or 1% of the total JPMorgan wants to help.

Originally posted at InjuryBoard by Paul Kiesel

White House to Ease Many Rules Aimed at Protecting Consumers

Paul Kiesel — Fri, 31 Oct 2008 18:41:15 GMT

Media outlets and blogs have been reporting for the past two weeks that the White House is working to enact a wide array of federal regulations, which would strip many government rules that protect consumers and the environment, before President Bush leaves office in January.

90 new regulations are in the works, and at least nine of them are considered "economically significant" because they impose costs or promote societal benefits that exceed $100 million annually, according to the Washington Post.

Unfortunately, a lot Bush's regulatory proposals reflect new interpretations of language in federal laws. Other proposals reflect new executive branch decisions in areas where Congress left the president with the ability to "flex" his power and excercise his discretion at will, since Congress is now out of session and focusing on the elections.

Here is White House Chief of Staff Joshua Bolten's memo, that was written May 9, 2008, stressing that everyone (everyone that the memo was addressed to) needs to "sprint to the finish" in order for regulations to be finalized before a set deadline of November 1, 2008.

Below is a chart that displays five proposed regulations, the proposal date, length of comment period (most of the regulations have a comment period around 30 days), and the amount of days the Office of Management and Budget needs to review the regulation before it takes legal effect.

The Bush White House is trying its best to get everything done before the next administration takes office on January 20, 2009, when the next president would be able to void any proposed regulation that is still under review.

Rule Description	Proposal Date	Length of Comment Period	Days under OMB review
Department of Health and Human Services rule which could reduce women's access to federally funded reproductive health services. • Find out more from Reg•Watch, OMB Watch's regulatory policy blog • Proposed rule text	Aug. 26	30 days	Less than 1 day
Department of Labor rule which would change the way occupational health agencies calculate estimates for on-the-job risks. • Find out more from Reg•Watch • Proposed rule text	Aug. 29	31 days	49 days
Mine Safety and Health Administration rule which would require drug testing for miners. • Find out more from Reg•Watch • Proposed rule text	Sept. 8	30 days	84 days
Department of Interior rule which would change the way government agencies comply with the Endangered Species Act. • Find out more from Reg•Watch • Proposed rule text	Aug. 15	31 days	3 days
Department of Justice rule which would allow local law enforcement to engage in domestic spying without good cause. • Find out more from OMB Watch • Proposed rule text	July 31	33 days	70 days

Originally posted at InjuryBoard by Paul Kiesel

It Could Happen to Anybody...

Paul Kiesel — Thu, 30 Oct 2008 21:02:36 GMT

Here's an excellent piece written by Mike Cassidy of the San Jose Mercury News on the realities of the foreclosure crisis, which has yet to be abated by the government or lenders.

Mr. Cassidy's thesis is: It's futile to blame ALL homeowners who are facing foreclosure because it could have happened to anybody, and it very well could still happen for people who are in Pay Option ARM loans that have not had interest rate resets.

On top of all this, many different borrowers, from multifarious economic backgrounds, took out loans that appeared to be "good loans," when in fact the loans had several TILA violations. Some of these violations were surreptitiously placed; sometimes information, like the loan being a negative amortizing loan (which, according to the Truth in Lending Act, needs to be stated in the loan, if it's that type of loan), was left out all together. Therefore, lenders and certain mortgage brokers willingly advertised and sold these loans to customers, when they had no business of being sold from the onset.

Here's a link to a blog I wrote a couple weeks ago that briefly explains part of the nascent stages of the economic crisis that allowed for this mortgage mess to precipitate as it did, and how government regulators, according to Senate Banking Chairman Chris Dodd (D-CT), including the Fed, failed to adequately police the mortgage lending markets, resulting in the "creative mortgage" boom and its fallout.

From MercuryNews.com:

SAN JOSE—We are a nation of blamers.

When something goes terribly wrong — like the current economic collapse — we desperately want to blame someone and if at all possible punish them, too.

For months now, as the economy and our notions of it have unraveled, we've been doing a good job pointing fingers. Democrats blame the Republicans. Republicans blame the Democrats. Greedy Wall Street operators are high on the list of suspects. Bumbling, or worse, Washington regulators have taken their punches, too.

The truth is, they all share in contributing to the stunning chain of events that has taken down world financial markets and national economies.

But the finger-pointing that has surprised me the most is the chorus of complaint directed at those who have recently lost their homes or who are in imminent danger of doing so.

You hear it on talk radio and see it in newspaper commenting sections now that the Treasury Department is exploring ways to use some of the $700 billion Wall Street bailout to help struggling homeowners hang onto their homes.

Readers and radio listeners describe those who are losing their homes as shiftless and lazy. Those foreclosed upon are chiselers who tried to get away with something, or they're irresponsible buyers who wanted a nice house whether they could afford it or not. In short, this thinking goes, they got what they deserved.

Along with the condemnation comes a smug superiority: I worked hard and found a home within my means. I pay my bills. Why can't those who are losing their homes do what I did? Using my tax money to help those in trouble is simply not fair.

But you know what? Life isn't fair. Ask those about to lose their homes.

No doubt there have been some bad operators taking loans as well as making them. But what the rants lack is any acknowledgment that sometimes events are beyond our control. I wonder whether those of you who are scolding struggling homeowners believe you are immune from the unforeseen and unfortunate events that can derail a comfortable life.

Maybe you bought your home years ago and have enough equity to cover the balance if you have to sell. Maybe you have a fixed-rate loan that has insulated you from climbing monthly payments. Maybe you dealt with an upstanding broker instead of a mortgage shark who sold you a loan that not only balloons, but blows up in your face.

Could be you didn't get sick or divorced, or lose your job. Maybe your spouse didn't lose his or hers.

Maybe you're not like the school teacher and mother from Union City who wrote to me recently. She'd just lost the house she owned for eight years. She said she refinanced after a divorce, so she could buy out her husband and lower her monthly payment. Then she lost the second job she worked to hold it all together.

Or maybe you're not like the retired couple in San Jose whose kids wrote to me. The couple's biggest crime apparently was trusting the wrong people — first an accountant who swindled them, and then a series of predatory loan brokers who relatives say falsified the couple's income and stuck them with a $6,000-a-month mortgage that they have no way to pay.

The angriest ranters out there will point out that the school teacher and the retired couple made their choices. Now they must live with the consequences.

When bad things happen, it's so simple to invoke the canon of personal responsibility. It's cut and dried. Tough people take responsibility. Wimps ask for help. The problem is that by relying solely on the rule of personal responsibility we risk absolving ourselves of our social responsibility.

It's something to think about as we head into economic hard times likely to be unlike any most of us have seen. Because the truth is, if we hope to survive what's coming we're going to have to do a lot better by each other.

Originally posted at InjuryBoard by Paul Kiesel

Reuters: Microsoft Warns of Financial Crisis E-mail Scams

Paul Kiesel — Wed, 29 Oct 2008 15:58:47 GMT

Loan modification scams are becoming more prevalent as most of the nation, along with nefarious scam artists, is aware of the $700 billion financial bailout that was passed weeks ago. Congress and other consumer advocate organizations have also been urging lenders, as part of the recommendations of the bailout package, to modify loans in order to protect themselves against further financial damage and to abate the strength of the foreclosure crisis.

Also, check out my blog from yesterday which discusses other loan modification scams that aren't as sophisticated as e-mail scams, however, they can be implemented just as effectively.

From UK Reuters: LONDON, Oct 29 (Reuters) - Internet fraudsters will try to exploit the global financial crisis by sending fraudulent emails purporting to offer cash-strapped consumers new mortgages, loans or money from failed banks, a Microsoft executive said on Wednesday.

Tim Cranton, an Internet safety expert at Microsoft, said there are early signs that criminals have already begun trying to cash in on the economic turmoil.

"It's especially troubling right now with the financial crisis," he told Reuters in a telephone interview. "There are more and more people who are maybe in a more desperate or vulnerable situation.

"We have seen an increase in some mortgage refinance type of scams. We are anticipating that they'll become more sophisticated.

"We have seen that with Hurricane Katrina, the (2004 Asian) tsunami and other natural disasters where the scammers immediately jump."

Fraudsters may send spam emails to consumers that ask them to pay a fee related to the collapse of a bank or financial institution, he added.

"They will allege it is associated with the refinancing -- so because of this bailout you'll get a much better deal on your mortgage and all you have to do is pay this fee."

Online criminals have long used promises of easy money to try to defraud unsuspecting victims.

Common scams include requests to help move money out of a developing country. People are offered a cut of the fortune if they first pay a release fee.

Or they are told they have won a lottery in a foreign country and will receive a huge jackpot once they pay an administration fee.

A poll for Microsoft on Wednesday found more than a quarter of computer users thought it was likely they would fall victim to an online scam that would cost them money.

Half said the scams made them more wary of shopping online, while more than a third said it led to them being more reluctant to use the Internet at all.

However, the poll suggested that the actual chances of becoming a victim are far lower than the perceived risk.

Of 5,000 people polled across Europe, only 113 had lost money to an Internet fraudster in the last year. That equates to one in 44 of those questioned.

Microsoft said it has formed a coalition with Yahoo!, Western Union and the African Development Bank to help spread the message about hoax emails.

"What we'd like to do is raise awareness so that people feel more confident about using the Internet," Cranton said. "We don't want to see a reduction in e-commerce."

Originally posted at InjuryBoard by Paul Kiesel