You may have noticed that the stock ticker these past few days is tapping out a happy tune. The immediate crisis is over. So now our bold candidates are emerging from their bunkers to lubricate their index fingers and pronounce in forthright terms how the Federal government should respond post haste.
"If the Fed can extend $30 billion to help Bear Stearns address their financial crisis," she said, "the federal government should provide at least that much emergency help to families and communities address theirs." - Hillary Clinton, March 24, 2008
More below
One the one hand we have Hillary Clinton just today expounding about how this is all hinges on -- get this -- tort reform? Sounds eerily like a pug talking point circa 2000:
The New York senator proposed greater protections for lenders from possible lawsuits by investors, a variation of so-called tort reform. For years, GOP leaders have called for restrictions on what they consider unwarranted lawsuits against businesses. Democrats have often resisted them on grounds they limit injured parties' legitimate rights to redress.
"Many mortgage companies are reluctant to help families restructure their mortgages because they're afraid of being sued by the investment banks, the private equity firms and others who actually own the mortgage papers," Clinton said in what she billed as a major address on the economy at the University of Pennsylvania.
"This is the case even though writing down the value of a mortgage is often more profitable than foreclosing," she said. Clinton said she would offer legislation "to provide mortgage companies with protection against the threat of such lawsuits," but provided no further details. - A.P.
To be fair, if you don't like that solution she has others. The problem though is that it coat-tails on Christopher Dodd's proposal along with Barney Franks' idea floated about on March 13.
Let me explain the dangers and hidden agendas even Clinton, Dodd and Frank aren't immediately concerned about.
What is happening on Capital Hill surrounding the great Credit Crunch of 2007-08 is an evolving opinion/push to enlist the full force of law to have a Resolution Trust like solution foisted upon the taxpayer to take responsibility for mortgage-backed debt. The RTC was the government created entity charged with cleaning up the S & L disaster at the public cost of $75 billion.
If you've followed this closely, it has already begun with a series of proposals and moves by the regulators first, then Congress, and now a presidential candidate/Senator.
The first move apart from the Fed's actions these last few months, was to remove the restrictions imposed on the government backed mortgage companies Freddie Mae and Freddie Mac. Instead of requiring 30% capital reserves to back up their risks (after a small scandal involving fudging their books last year), the regulators were ordered to lower this threshold to 20%. This in turn would free up around $200 billion to loan relatively safe mortgages on the open market. I don't know about you, but my instincts tell me that this is opposite to what the financial firms are doing to protect themselves from further losses. They are increasing their capital reserves.
Now we have Clinton ala Dodd and Frank, proposing to engage the power of the Federal Housing Authority. The idea is to buy up all those mortgages facing foreclosure, have the taxpayer take on the risks of the most toxic financial paper ever invented, and resell them to banks with all the guarantees that go along with our the new "New Deal" for billionaires. This they imagine would help convince the banks to refinance these loans on manageable terms for the "families". Because, don't forget, this crisis is all about "families".
But it won't stop there:
For Pimco's Gross that's not enough. ``If Washington gets off its high `moral hazard' horse and moves to support housing prices, investors will return in a rush,'' he wrote in a note to investors published Feb. 26. Gross, who runs the $122 billion Total Return Fund from Newport Beach, California, didn't return calls seeking additional comment.
An RTC-like entity may not be ``the best idea, but maybe it's the idea that gets us through this,'' said New York Life Investment Management's Girard. ``The likelihood of it happening has certainly increased.'' -Bloomberg
Who is Bill Gross?
Like Noah building his ark as thunderheads gathered, Bill Gross has spent the last two years anticipating the flood that swamped Bear Stearns about 10 days ago. As manager of the world’s biggest bond fund and custodian of nearly a trillion dollars in assets, Mr. Gross amassed a cash hoard of $50 billion in case trading partners suddenly demanded payment from his firm, Pimco. - NYT
Now to be fair, Bill Gross is a smart man. He squirreled away for the raining day now upon us and is in a very good position to expound away about what the government should do. But there is a more self-serving reasoning behind his entreaty that Congress must act in the case of mortgage bonds:
"Bear Stearns has made it obvious that things have gone too far," says Mr. Gross, who plans to use some of his cash to bargain-shop. "The investment community has morphed into something beyond banks and something beyond regulation. We call it the shadow banking system." [bold mine]
You see Bill has been promoting the municipal bond market as the new bargain basement strategy for investors looking for higher yields. He and PIMCO are downright bullish about the opportunities the crisis has laid bare. The only thing that stands in his way of huge profit margins is well, confidence. In the form of an arcane stat know as the TED spread:
Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans almost doubled in the past month to 1.69 percentage points. [TED spread]
The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk. - Bloomberg
This tells us that we are nowhere near out of the woods with this mortgage backed debt. Whatever the Fed did to step into the breach this past week has not in anyway solved the riddle of CDO's or the investor's aversion to them like rabid dogs to water.
So why is Mr. Gross so concerned about the mortgage bonds when he himself is going into munies whole hog? It has to do with bond insurers like MBIA and Ambac et al. If those very same bond insurance firms go under because of all the toxic debt they're obligated to then Mr. Gross's investments in munies go with them. The high rates of insurance to back up the conditional AAA ratings municipal bonds have to have make his bets look bad long term.
So in short, Congress is being pressured by the billionaire Gross all over the press to bail out the mortgage backed debt. A bailout nothing short and probably immensely larger than the RTC of the S&L disaster. He's doing it to shore up his own portfolio long term ( and let's not forget that those in the markets who's cries are consistently the shrillest throughout history, are those who hold long term investments like bonds). Congress, as shellshocked as they appear to be over this whole tsunami, are going to play right along with the fiddle and claim that this is all about the "families" disregarding that families also pay taxes and probably wouldn't go along with the huge risks the federal government will be taking on in losses to save what otherwise can't be salvaged at this point.
And full circle we have Hillary's brave new proposals:
"If the Fed can extend $30 billion to help Bear Stearns address their financial crisis," she said, "the federal government should provide at least that much emergency help to families and communities address theirs."
What she doesn't see is that a new federal gov't program to bailout subprimes is just a complement to the investment firms rescue by the Fed. For primarily bond holders not "families". If the government feels the need for a relief program, by all means effect one, and with taxpayer money. I'm all for it:
Clinton's remarks built on her earlier proposals on the housing issue. Last week she called for a new stimulus package to include $30 billion to help state and local governments buy foreclosed properties, restructure mortgages, and undertake "anti-blight programs." She proposed another $10 billion for state housing agencies to refinance "unworkable mortgages."
Clinton also has called for a five-year freeze on interest rates for all subprime mortgages, which often go to borrowers with poor credit ratings. - A.P.
But this RTC idea just trades, and that's the operative word, trades the financial assets of the taxpayer for junk. It implicitly assumes horrendous risk, lost value, simply to "service" the financial industry and act as an extractor of poison, disguising itself as relief for the middle class.
Her other idea was so Clintonesque I just about barfed.
She also called on President Bush to appoint "an emergency working group on foreclosures" to recommend new ways to confront housing finance troubles. She said the panel should be led by financial experts such as Robert Rubin, who was treasury secretary in her husband's administration, and former Federal Reserve chairmen Alan Greenspan and Paul Volcker.
Kinda reminds me of that movie "The Smartest Guys in the Room".