The White House caves?
Limits on executive compensation AND an equity stake. What an outstanding instance of principled resistance producing improvements in policy. Bravo to the Presidential candidates of both parties, and to those leaders of Congress whose pressure brought this about. Checks and balances: we has them.
It’s still not a good bill, but it’s no longer a disqualifier where my Presidential vote is concerned. Let’s hope they keep pushing for more.
Indeed.
Bush has no more friends. Precisely nobody. The Republican nominee, the Republican congressional minority, the Republican intelligensia, the Republican media, none were willing to get on board with “just trust us” or go to bat for the administration. And for once, there was stiff opposition and an intelligent and well-played counter-proposal from the Democratic nominee and the Democratic congressional majority. Both get equal shares on this one—the opposition staked out the counter-proposal, and the Republicans indicated they weren’t going to be there to throw down for the administration if it came to it.
The “let’s do nothing and let the market go through its admittedly painful corrections” stance still has no real support, but the blank check notion meets its end. Be interesting to see if there’s further showboating left on this one (and the extent of it), but as far as Bush and the Treasury are concerned, Lame Duck it is.
And the “focus as much on Main Street as Wall Street” line propagates further, from the first speech Obama gave on the matter to Secretary Paulson’s lips…
Comment by Brad — 9/25/2008 @ 12:23 am
sorry, dudes, i have to disagree here. This bailout is more or less transparently about handing over the counterparty risk of credit default swaps to the Feds to prevent the CDS market from imploding. This market essentially didn’t exist 5 years ago and now it has ballooned to 70 Trillion in notational value; but in many ways CDS are accounting ponzi scheme hedges designed to paper over the risk of trading in junk mortgage securities. These fucks made unconscionable fees and bonuses and now they are going to run to the State to institutionalize and guarantee this junk, meanwhile insinuating themselves into a new corporatist, managerial government class. This is naked plutocracy at it’s worst. I’m sorry, you have to let this shit die. You are essentially seeing the Rothbardian theory of the State in action in real-time with the plutocracy threatening a massive depression if the Feds won’t guarantee their junk.
Comment by Kaligula — 9/25/2008 @ 2:11 am
Kaligula, I read your comment and then headed over to your blog and read the post on the same subject. Then I reread your blog post.
Yeah, well even after that, I don’t know the meaning of half of the concepts you’re using.
As best as I can understand you’re upset that the bailout is bailing out hedge fund managers who recently gamed the system to create a way to hide the riskiness of their investments. You’re also upset that these same people are threatening the government with long lasting economic repurcussions if the government fails to dole out cash.
That being said, I am still struggling to comprehend your critique. What exactly is upsetting you?
Are you pissed that idiots that gambled and lost are getting reimbursed with taxpayer money? Is it the specific recipients of the money that upsets you? Do you see some sort of immoral influence being exerted on the government to direct cash their way?
I may be wrong but equity stakes seem like a great way to distort the money making potential of this deal for the recipients of government funds. Even better are compensation caps to again limit the largess and rewards that this bailout grants specific individuals. Again, I’m no expert in this field and my brain is hurting trying to comprehend all of this high finance stuff, but I am with Rojas in thinking that the recent turn of events with the bailout are welcome ones.
Comment by Cameron — 9/25/2008 @ 3:02 am
Cameron:
the privatization of the huge front-loaded profits and the socialization of the backend counterparty risk doesn’t bother you. Ah, the solution is for the State to take equity positions in the credit markets. LOL, now the State has an equity position with respect to monetary policy. Talk about a rigged game. With respect to CDSs, the fees and earnings were all front-loaded; that’s squeezing blood from a turnip these days. You know it’s not Ralph Nader’s minions who will be running the regulatory show, it’s the wall street plutocrats who benefited from this ponzi scheme in the first place.
Comment by Kaligula — 9/25/2008 @ 4:24 am
I’m sympathetic, Kal, and as I mention in my post above, it’s still a bad bill, one I myself would vote against.
I am attempting, however, to recognize political reality. SOME form of bailout is going to pass. I wish it weren’t, but there it is.
As recently as a couple of days ago it appeared that we were going to get a no-consequences monstrosity that would have centralized power in Paulson’s hands to an unprecedented degree. People like yourself spoke up; pressure was applied; and a bad deal was made somewhat better. That’s worth recognizing.
Comment by Rojas — 9/25/2008 @ 9:39 am
One presumes that the administration had at least some thought of the positions on which they could give in order to placate Congress (given that they can’t have imagined that they’d get this to sail through a House and Senate controlled by their political opposition and with some Republicans bound to be irritated by it themselves). I wonder, actually, what’s flexible and what isn’t.
Comment by Adam — 9/25/2008 @ 10:01 am
The entire bill bothers me. I dispise this massive government intervention and would rather the guilty parties fall flat on thier asses because of their stupid investments.
I was mostly trying to understand your critique of Rojas’s notes that the bill is becoming less bad. I agree with both of you guys – the bailout is atrocious. But it strikes me that it is starting down the path of not quite so bad, which I welcome.
Comment by Cameron — 9/25/2008 @ 11:15 am
It’s a crappy bill to deal with a crappy situation. Had the Bush government been half as proactive on Wall Street as it had been on Freddy Mac and Fanny Mae, had the government taken action months – no – years ago to inform the public and rectify the situation, had the Bush government chosen – not only to not enforce the law – but to use its Federal Jurisdiction over national banks to prevent states from enforcing their laws against predatory lending, this situation would not be what it is.
People need regulated markets with a competent, transparent government doing the regulation. This last eight years has been a painful lesson on life without real rule of law nor fear of consequences. What can you say, other than “Don’t vote for goddamned republicans”. Until they become the party of Eisenhower again, they are the ones that belong in Siberia, not Brad.
Comment by thimbles — 9/25/2008 @ 11:53 am
that sentence should have read ‘not chosen’
I really shouldn’t have not not written that sentence in not that way.
Comment by thimbles — 9/25/2008 @ 11:58 am
What is ‘predatory lending’ in this case? If it’s just giving expensive mortgages to high-risk individuals, boo hoo. If it’s already illegal under fraud laws, that’s a different matter (but then, can the Federal Government tell states not to enforce their own fraud laws?). Which laws were rolled back by Federal fiat?
Comment by Adam — 9/25/2008 @ 2:14 pm
Also, Siberia is roomy enough for Brad and lots of other politicians. Stalin managed to fit a lot of people like Brad and those with other political opinions into Siberia. Say what you like about Stalin, but he made the slaves run on time. Through the snow. In bare feet.
Comment by Adam — 9/25/2008 @ 2:15 pm
Indeed. A lot of what’s now called “predatory lending” used to be called “necessary remedies against discrimination by lenders”.
At some point people have to be responsible for signing contracts that they have no rational hope of fulfilling.
Comment by Rojas — 9/25/2008 @ 3:59 pm
Predatory lending is when a broker knowingly gives false information to clients, knowingly fills in false information about clients, and knowingly sells the whole false package to investors as a better value than it is.
It’s the calling up of solvent old people and using high pressure sales tactics ensure they are ruined. It’s the pushing of clients with good FICO scores to the worst loans they qualify for because they granted the highest commissions.
It’s basing an economy on the single principle of “what makes ME the most profit now” without consideration of legality, honesty, or consequence. It’s fraud.
And you can mind out more about this here:
http://www.cjr.org/essay/boiler_room.php
http://thisamericanlife.org/Radio_Episode.aspx?sched=1242
(pdf transcript) http://thisamericanlife.org/extras/radio/355_transcript.pdf
And what the Bush administration did was they refused to enforce rules to protect the whole economic system from credit fraud. And they used Federal jurisdiction to prevent states from attempting to do the same.
http://www.consumersunion.org/pub/core_financial_services/000770.html
So you have stories like this:
Fraud was ubiquitous, and fraud does not a good basis for an economy make. During the Bush years, the tools of fiscal responsibility were dismantled so as to build an ownership society and ’suddenly’ we have a crisis because that society was a fraud.
The companies which encouraged fraud are being bailed out because the economy depends on them, but does the economy also depend on the victims of fraud, the ones victimized because the Bush administration and Alan Greenspan refused to do their jobs of oversight and law enforcement? People abused their information asymmetries not for the noble goal of offering “necessary remedies against discrimination by lenders”, especially since the law in question was a)gutted by the Bush Administration b) loans offered under the protection of that law were highly regulated and scrutinized. Therefore, the loans made were within the borrowers ability to repay.
Nothing forced the banks to offer the odious loans except stupid greed and lax law enforcement. And that is why, my friends, the taxpayer must bail them out.
Comment by thimbles — 9/25/2008 @ 8:11 pm
So you are referring to a particular sort of ‘fraud’, right? Fraud is illegal under conventional law.
Although the broker isn’t the lender, so I am not sure why it’s ‘predatory lending‘, and I don’t see that the companies being bailed out are the people involved in the fraud as they are also getting screwed even as they are bailed out (share prices have tanked, etc). I guess some particularly cunning banks might have decided to expose themselves to ruin expecting the Treasury to get unprecedented powers to bail them out years down the line when it all went wrong, but I’d want more proof that the lenders were encouraging fraud (either by brokers or by borrowers).
What fraction of the crappy loans are a result of broker fraud alone, thimbles? Compared to brokers and borrowers colluding in fraud, say, or just poor decisions by borrowers (who are, you recall, adults)? Chris Dodd’s comments on ‘predatory lending’ last year are clearly not merely restricted to frauds, though.
Comment by Adam — 9/25/2008 @ 10:44 pm
Also, you want to know who’s really getting bailed out by the taxpayer? Most of all, it’s the people who own houses that aren’t bought with stupid loans, who have nevertheless had their equity eroded by tanking prices, the people with pensions funds or other investments in the markets and the people that would suffer as a result of economic calamity (nearly everyone). That’s the rationale behind this and I thought you’d approve of that (I am more cautious, because we should all prepare for hard times ahead, although I appreciate that there’s a limit to how hard those times can be before achievable preparations aren’t enough).
Comment by Adam — 9/25/2008 @ 10:47 pm
Yeah. Sorry, thimbles, but the extreme example you present doesn’t come close to typifying this situation.
You have, in America, a lot of people living by more or less the exact same standards they expect from their politicians: live it up now, pass the costs on down the road. It cannot possibly be a coincidence that a nation with a zero savings rate and massive private debt is also composed of people who make remarkably stupid mortgage decisions.
By all means, prosecute fraud. That is what the government is for. But the prosecution of fraud does not necessitate a broad regulatory web related to non-fraud issues. In particular it does not justify a federal bias in favor of the promotion of home ownership, or onerous regulatory behavior encouraging lenders to make mortgages available to people with poor credit risks.
By and large, this is about people making bad decisions; lenders and recipients both. And that is what makes it unreasonable to ask me–a man in his mid-thirties who rents for a living because I fully recognize the insuitability of home ownership in my case–to have my assets seized in order to bail out people who chose to live more extravagantly.
Comment by Rojas — 9/26/2008 @ 12:05 am
Agreed. The regulations I favor are those that force a separation between deposit banks + their operations (insured by the fed) and investment banks + their operations and those that force transparency and openness that made American markets a safer place to invest and the envy of the world.
But the difference between the policies enacted by the democrats and republicans to achieve “a federal bias in favor of the promotion of home ownership, or onerous regulatory behavior encouraging lenders to make mortgages available to people with poor credit risks” is that the demcrat initiatives were solvent approaches and were not responsible for this mess.
The Bush approach was similar to their rebuild Iraq approach, criminal negligence.
Better to rebuild equity by rebuilding the housing market, and that isn’t done by foreclosing on every person that was taken advantage of.
And it isn’t done by giving billions of dollars to dumb loans makers in exchange for trash.
Comment by thimbles — 9/26/2008 @ 12:28 am
We actually agree on a lot of things here.
Clearly, we must both be wrong.
Comment by Rojas — 9/26/2008 @ 12:38 am
First off, listen to the radio program I posted.
…..
You done?
Okay.
Now you know that the brokers were using their own leverage to set up loans which the big security firms would buy off the brokers to package as debt pools to sell to investors. That’s why they all went ‘broke’ when the investment banks stopped buying their shit. They were leveraged 20 to 1 when the market went bust and the debts they brokered were transfered to the banks who lent them the money to broker.
As the program put it:
Read this article
http://www.cjr.org/essay/boiler_room.php
and pay particular note to the parts like this:
…..
You done?
Okay.
This kind of thing was UBIQUITOUS. Not an extreme, it was the way business was done because demand for ABS’s was really high, money was really easy, shortcuts were really tempting especially considering the federal government and the federal reserve were telling people to party.
http://www.allbusiness.com/finance/1075991-1.html
http://www.nytimes.com/2007/12/18/business/18subprime.html
http://www.nytimes.com/2007/12/21/opinion/21krugman.html
The system failed. Why is the consumer held solely responsible?
Comment by thimbles — 9/26/2008 @ 4:02 am
Thimbles, I’m not going to follow a linkstorm. If you summarise your claims here you can offer it as supporting evidence, but I’m not going to go away and listen to a radio link as a proxy for you explaining.
I do agree, however, that the issue with selling-on of the debt is critical; indeed, the main regulation required here is to prevent the obfuscation of the quality of the debt in the markets (as I have said before). Much better than regulating which loans can be offered on which terms.
Comment by Adam — 9/26/2008 @ 8:36 am
Sorry if you didn’t appreciate the ‘link storm’ but I’ve had this discussion with you twice about “predatory lending” elsewhere and you keep asking the same questions to anyone who brings it up, “What is this ‘predatory lending’ malarky? Boo hoo. People who are stupid deserve stupid loans. If borrowers can’t be ‘responsible’ for their own credential health then letem die. Financial darwinism. What a stupid topic. Good day.”
And it’s not like I’ve been absent of answers elsewhere, so I have to assume it’s willful ignorance, because you are not stupid.
So, because you’ve chosen to be willfully ignorant, I put these links – not for you, but to spite you. You do not know what you are talking about with this credit crisis because you’ve chosen not to know, and it is my hope that others don’t do the same.
But I also acknowledge that Rojas and I have hit points of agreement, by sheer chance one must assume, so there’s a good chance we’ve wandered off into the intellectual wilderness.
I hope you packed a flare Rojas because I am prepared to eat you.
Comment by thimbles — 9/26/2008 @ 11:10 am
What I’m asking you for is a list of what you consider be to predatory lending practices that require regulation and also we need some estimate of the fraction of the problem that is caused by these. That can hardly be too hard to type or copy and in return, I won’t insist you go off and read or listen to stuff I can’t be bothered to summarise.
Comment by Adam — 9/26/2008 @ 12:05 pm
I consider these practices predatory:
1) The broker knowingly writes in false information on an application, with or without the borrower’s knowledge, to get the loan processed. Information should not be entered unless the client has provided copies of documentation detailing his background.
2) The broker tells the applicant the terms of a loan which differ from the description on paper. It is the job of the broker to provide accurate information, not to lie about the terms to secure a debt.
3) The borrower does not give the full range of loan products available the customer based on their eligibility. Expensive loans have bigger commissions, so that’s the only one offered.
A crap. I’m drowsy.. More later
Comment by thimbles — 9/26/2008 @ 1:05 pm
So far as I can see, 1) is fraud (so already illegal), 2) appears to me to be fraud and 3) is up to the buyer. On 3), I don’t mind if there’s a regulation stipulating that the broker should make clear that he’s benefiting from different paybacks for selling different products (if that is the case: this would allow for brokers who work for the buyer and take the fee from them and not from the lenders). Such regulation might best be at the state level,
Comment by Adam — 9/26/2008 @ 1:11 pm