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The Committee of Three: Paulson, Bernanke, & Geithner

Original post made by Left of Boom on Sep 19, 2008

Many on these forums have decried the actions of the Treasury and Federal Reserve. I commend them for acting quickly and decisively to avert an loss of confidence in the U.S. financial systems which would have touched even lively Palo Alto :-) It wasn't pretty and some their actions seemed ad hoc but this week's meltdown would have been a lot worse if they didn't bailout AIG and insure money market funds. People who think that the Federal Government did not have to rescue Freddie Mac, Fannie Mae and AIG don't understand the implications if they failed. Once the retail investor sees that his money market fund is only paying 85 cents on the dollar, 3.5 trillion dollars would flee the market and make this week look like child's play.

In a few weeks, we shall see if the Committee of Three have averted the worst financial crisis in the last 50 years.

Web Link



Comments (30)

Posted by bailout bubble, a resident of South of Midtown
on Sep 19, 2008 at 7:57 pm

The United States has become a socialist, communist, fascist country run by the rich for the rich. The bailout bubble lets those who did wrong get off without any punishment. The irresponsible CEO's who lent money to people who could not afford to pay it back are not even getting a slap on the wrist. Hey, you made a bad investment? No matter, here's some taxpayer money for ya. This is highway robbery. I never signed up to give my hard-earned money to some loser CEO.

Hey, if the Palo Alto Weekly goes bust for making bad real estate investments, do you think the Palo Alto City Council should redirect city tax funds to bail out the Weekly? Don't think so, because the Weekly is a private business with private individuals who took on private risk to invest in a news business. The Weekly wouldn't deserve public money.

So why do private companies on Wall Street get public money? I hate this blatant fascism, and stealing money from average everyday working people who had nothing to do with the sub-prime mess and giving it those incompetent greeedy Wall Street bastards!

I hope this country goes down in flames as they all deserve it.


Posted by OhlonePar, a resident of Duveneck/St. Francis
on Sep 19, 2008 at 10:18 pm

Bailout bubble,

How is this fascistic or communist? Socialist I get.

My understanding is that the government struck a pretty good deal financially on AIG. Don't know much about son-of-Resolution Trust Corp.

I agree it's galling that the big boys get to play by different rules than the rest of us, but my understanding is that the problem is so widespread that the government has to stabilize the markets by restoring trust. No trust; no credit. No credit; no trading. Unfortunately, we're paying for that restoral of trust.

Which is my way of saying the bail-out's probably necessary, but I don't have to like it. But then I'd like there to be something in my 401K plan down the line.


Posted by Walter_E_Wallis, a resident of Midtown
on Sep 20, 2008 at 3:14 am

Walter_E_Wallis is a registered user.

Perhaps we need a new mortgage instrument whereby if the borrower cannot make the full payment, instead of foreclosing and flushing the borrower's equity, the term of the loan is extended to compensate the lower yield, or the lender becomes an equity participant.


Posted by bailout bubble, a resident of South of Midtown
on Sep 20, 2008 at 3:42 pm

Ohlone Parent,

Why do you need the government to manage your 401k?

Because you can't do it yourself? That's called baby socialism. It seems you need the government to intervene and babysit your 401k.

I do not need the government because I manage my own money, and I want them to stay out of my pockets!!!


Posted by OhlonePar, a resident of Duveneck/St. Francis
on Sep 20, 2008 at 3:51 pm

Bailout Bubble,

Even people who work full time on Wall Street don't know the extent of the effects from the mortgage crisis. *That's* why we're stuck with a bipartisan bailout--financial markets require trust to function. It's that simple.


Posted by bailout bubble, a resident of South of Midtown
on Sep 20, 2008 at 4:01 pm

OhlonePar,

Ya, I trust your kids will be paying for my Wall Street profits from this bailout. LOL!!


Posted by OhlonePar, a resident of Duveneck/St. Francis
on Sep 20, 2008 at 9:06 pm

bailout,

Like I said, I don't like it better than you do. I just understand why it's happening.


Posted by Left of Boom, a resident of Another Palo Alto neighborhood
on Sep 21, 2008 at 12:28 am

Left of Boom is a registered user.

Nobody likes the bailouts. The Committee of Three just doubled the TOTAL U.S. Deficit, not just this year's deficit. But we were very close to a complete loss of confidence of the financial markets and a collapse into a depression was a very real possibility. Just how quickly do you think Congress could have debated a plan and passed it to avert this meltdown? Outside of the Treasury and Federal Reserve, how many others in this administration understood the severity of the situation?

If the U.S. collapsed into a depression, no Republican would elected President for the next twenty years. Even with that, I much prefer avoiding a depression.




Posted by bike, a resident of College Terrace
on Sep 21, 2008 at 12:41 am

The problem is solved, financial institution will now do due diligence, and the conflict of interest between trading and crazy loans is over.

Our children will have to pay for the mistakes of doing away with redlining.

All that is left is senseless bickering, let the markets work with true information about risk moving forward.


Posted by What free market?, a resident of Barron Park
on Sep 21, 2008 at 12:43 am

Gee, I wonder where "Free Market Gary" and his little posse of free market midgets is? Isn't it funny how these Internet wannabe free market mavens shrink from sight when stuff like this comes down.


Posted by OhlonePar, a resident of Duveneck/St. Francis
on Sep 21, 2008 at 1:13 am

Left,

I take it you read some of the coverage of how the three presented it to Congress--basically, bail us out or the whole damn house of cards collapses.

Even now, a lot of people don't seem to get how out of control this has been. At one point, traders were buying T-bills at a cost that was greater than the eventual pay-out--just as a way of limiting losses. Just insane.

Bike,

Please read something, you're making me pity you.


Posted by OhlonePar, a resident of Duveneck/St. Francis
on Sep 21, 2008 at 1:48 am

Oh boy, Paul Krugman doesn't think much of the terms of the bail-out. That's not a good sign:

Web Link


Posted by Left of Boom, a resident of Another Palo Alto neighborhood
on Sep 21, 2008 at 8:05 am

Left of Boom is a registered user.

Krugman has a point. The Legislation leaves most of the discretion to the Treasury. If Treasury pays premium prices instead of fair market value it may have to later sell them at a loss. But if they pay fair market prices, then many companies will be receiving 20 cents on the dollar and will still be in perilous condition. This legislation still does nothing for the mortgage holders who are underwater. Unless something is done for the homeowners, they are still going to default.

This two page draft is a marvel in clarity compared to most of the legalese we normally see in our laws.

Web Link




Posted by Please Explain, a resident of Green Acres
on Sep 21, 2008 at 10:36 am

"This legislation still does nothing for the mortgage holders who are underwater."

I have a fundamental problem here. Perhaps I am selfish, but I don't feel selfish. Rather, I feel bewildered. Someone please point me down the right path to understand this.

When someone buys a house, they know that they may not be able to sell the house at the price they buy it, and that the longer they keep the house, the more likely it is that they will see an increase in value of the house.

When they get a loan, the terms are spelled out clearly, and graphs, tables, or charts are shown indicating the likely future payments, given current conditions and also given changes in current conditions.

Over the past few years, there have not been sudden, large index increases driving payment increases above those that were indicated in these graphs and estimates. In fact, the most commonly used index, along with others, has remained low and stable.

Why should these people who basically bought what they could not afford be bailed out? They are not considering the consequences of their actions, and are hurting the rest of us by driving up housing prices into a bubble. It is a kind of financial air pollution, skewing all kinds of susceptible financial instruments throughout the US and now the world economy. These instruments are getting cancer from this pollution.

Can someone explain the strong push to help these people who have driven us into this mess, by lying (to the lenders or to themselves) about their current and probable future income? These people apparently are promising to make increasing payments without any thought about how they will do it. Now we want to mitigate the logical consequences of these choices because it's too harsh to put these people back where they were before they bought a house they could not afford?

I have a fixed rate loan of an amount I can pay. I did not buy the houses I would have preferred because I was not sure I could afford them. What is so difficult about that?


Posted by Gary, a resident of Downtown North
on Sep 21, 2008 at 12:09 pm

Please Explain,

You have hit the nail on the head! Good for you.

On the other hand, you have left out the incentives that were built into the mortgage market. These incentives were both governmental and private market. The government wanted an end to de-facto redlining, thus it allowed the private market to accept overleveraged positions, through bundling, securitization and various derivative mechanisms. It became the ownership society without real owners...they could just walk away, if the going got tough.

Mortgage brokers were having a hay day, selling absurd loans (e.g. no down payment, cash out) to individuals who could not possibly make the payment, after the reset, unless rates were as low or lower than the date of purchase. A typical broker would say something like, "If you don't like the reset, after five years, you can just refinance again, with your increased equity".

If banks get back to 20% down, with full disclosure of credit and earnings history, this thing will work out. Of course, redlining will be back in force.




Posted by another bailout for the "free" market, a resident of Greenmeadow
on Sep 21, 2008 at 12:18 pm

"Can someone explain the strong push to help these people who have driven us into this mess, by lying (to the lenders or to themselves) about their current and probable future income?"

uh, first, you don't know what you're talking about. 2nd, you might READ something except your navel, and learn that most mortgage brokers and banks were all too happy to overlook unqualified applicants and pass them on for approval, because they made commissions on the one hand, and profits by bundling on the other. How is it that a bank let's an unqualified lender through the system.


oh, and notice how "Free Market Gary" slithers out of another position, just like the CEO of Lehman - blame it on the poor! LOL!


Posted by OhlonePar, a resident of Duveneck/St. Francis
on Sep 21, 2008 at 1:29 pm

Please Explain and Gary,

Sorry, you've got this all wrong. The bail-out does NOT help home buyers who got in over their heads. Those people are already defaulting and many have walked away from their mortgates.

The problem was not poor people, per se, but a much more systemic issue. Basically, through the bundling of securities, mortgage lenders had no reason NOT to approve high-risk loans. They would grant them and in a matter of weeks, bundle that high-risk mortgage and resell it. The mortgage would be bundled up again and then resold.

The system operated so that the ultimate mortgage holder had little idea of how high-risk the original mortgage was, while the lender who did was getting away scot-free.

So it was the separation of risk from decision-making that got us into this mess. To blame this on redlining is to really, really miss the critical problem here. If it were simply redlining then we'd be seeing something more like the S&L crisis, which was relatively contained and didn't threaten to spread throughout the entire financial system.

It's because of the way the securities have percolated through the entire system (NO ONE even knows the full extent of the problem) that we've got this massive bail-out happening. It should have been prevented of course with, yes, regulations that kept mortgage lenders responsible for issuing bad loans. But it's been a free-for-all.

The possibility of all this has been on the horizon for some time--but we've had an anti-regulation mindset in Washington under the last four administrations. Bush didn't want to do anything because the housing bubble was a way of avoiding a recession after the dot-com bust.

Until it blew up in our faces. I hope we get the right regulatory system in place.


Posted by Left of Boom, a resident of Another Palo Alto neighborhood
on Sep 21, 2008 at 1:32 pm

Left of Boom is a registered user.

No one is bailing out Wall Street or Mortgage Holders because they feel sorry for individuals who have made poor decisions. The Treasury and Federal Reserve are acting because if they don't stop the bleeding, the entire credit market is going to dry up. Sometimes you have look beyond an individual case for the overall health of the system. Would you rather change the terms of these mortgages so they don't default and perhaps lower adjusted rates or a longer term or have 10-20% failures and increasing loss of confidence? It may not seem fair, just as bailing out AIG is clearly not fair or the way a free market works. But if you allow the banks holding bad debt products to fail and most of the distressed mortgage holders to default, the credit market itself will probably cease to function.








Posted by Gary, a resident of Downtown North
on Sep 21, 2008 at 2:06 pm

OhlonePar,

If you read my last post carefully, you will understand that I agree with quite a bit of what you just said.

" percolated through the entire system "

Yes, absolutely. However, what were the motivations to do this? Tight regualtion, that you now seem to long for, was softened, becasue anti-redlining (direct or de-facto) was a major push by the Dems. The resulting housing bubble was, as you say, a way for Bush/Greenspan to climb out of the crash of the dot.com bubble, as well as 9-11 issues.

If you want tight regulation, again, then you will get redlining, whether it is called that or not.

20% down, with excellent credit and earnings, does not often occur behind red lines.

Given the mutual left/right motivations for the housing bubble, and given the ownership that it provided, it might not be a bad idea to just tighten things up a little bit (e.g. 10% down, no cash out, average credit rating). If things go bad again, then the government steps in, again, to bail out. That way, you get less redlining, and more ownership, with all the good that it brings to society at large. Semi-socialist? Yep. Mostly capitalist? Yep. Am I a hyprocrite, given my anti-socialist stance? Yep.


Posted by another bailout for the "free" market, a resident of Greenmeadow
on Sep 21, 2008 at 2:45 pm

"Am I a hyprocrite, given my anti-socialist stance? Yep."

Finally, a little self-insight! However, you're not off scott-free, yet. Redlining is not what you're saying. Redlining is general application of "no-loan" policy to entire areas. Redliners were notorious for making bad loans to applicants who were outside the redline zone. It was a policy based on geographic discrimination.


Posted by Gary, a resident of Downtown North
on Sep 21, 2008 at 3:33 pm

another,

"Redlining" has changed over time. You are correct that a map with a red line is no longer strictly used, however the real-world effect of bankers tightening standards will have almost the same effect. You will end up with bank loans mostly being offered in certain geographic zones, defined by race/income.

If you are saying that you want tight standards, the kind that old-fashioned regualtion would demand, then you are agreeing, implicitly, that redlining is back to stay.


Posted by OhlonePar, a resident of Duveneck/St. Francis
on Sep 21, 2008 at 4:33 pm

Gary,

I didn't say I wanted "tight" regulation. I want intelligent regulation. You can't have a system where the lender can offload risk with no repercussions--it creates a system where there's an incentive to make as many loans as possible without responsibility.

I think your use of the phrase "redlining" is misleading here--tightened loaning standards is one thing, redlining another. I've known fairly affluent people live way above their means and get into deep trouble. You also have to look at the overbuilding that occurred in many areas that drove down housing prices in the first place. Blaming the poor for the many, many things that went wrong is convenient, but misrepresents what happened.

But, again, this is a situation where self-regulation of the market failed badly--make lenders accountable for the risk that they're incurring and you'll immediately see less reckless lending policies. You're already seeing that.

So, it's a question of making sure that the checks and balances are back in place. And that requires thoughtful regulation of the markets--not things that make it impossible to get a loan or erases market liquidity. And since we're all in the hole for this, I don't see letting the mortgage kiddies who created this mess getting to spend our money without supervision or regulation. Which is what they want, by the way.

And, no, I just don't think McCain has the right set of advisors or mindset to handle it. He has exactly the wrong record and associations on this, unfortunately. (I say this because the election could go either way--and I really, really don't want this mishandled.)

And Obama can start giving us a clue about who'd be handling it under his watch any time. My sense of him is that he likes to keep his options open, but I could use some more here.

And we should all be grateful we live near a job center--real-estate in the hinterlands isn't going to recover for years.


Posted by another bailout for the "free" market, a resident of Greenmeadow
on Sep 21, 2008 at 4:45 pm

"If you are saying that you want tight standards, the kind that old-fashioned regualtion would demand, then you are agreeing, implicitly, that redlining is back to stay"

Nope, because, as you just admitted, specific geographic areas could no longer be redlined. THAT's what redlining is. Would certain areas have more mortgage rejections than others, yes, but they would be based on ability to pay, _not_ geographic proximity.


Posted by root 'em out, a resident of Barron Park
on Sep 21, 2008 at 4:50 pm

NYT: "Foreign banks, which were initially excluded from the plan, lobbied successfully over the weekend to be able to sell the toxic American mortgage debt owned by their American units to the Treasury, getting the same treatment as United States banks."

OK, I'll buy that, but not unless every single CEO and upper middle operative is fined, fired, or has income reduced to less than 6 figures for 5 years.


Posted by Paul, a resident of Downtown North
on Sep 22, 2008 at 10:52 am

This bailout by the taxpayers is an abject admission that capitalism rests on a crutch of socialism. Karl Marx is high-fiving in his grave.


Posted by Gary, a resident of Downtown North
on Sep 22, 2008 at 11:23 am

"Urged to Buy

The companies said they were urged to increase purchases of subprime debt by the Bush administration. The Department of Housing and Urban Development said in 2005 that Fannie and Freddie should increase financing for low-income areas or moderate-income regions with high minority populations to 37 percent of new business from 34 percent in 2001 through 2004. That rose to 39 percent last year."

Web Link

As I said, previously, this is the result of government trying to increase home owenership, where it would not have occured under tough regulation conditions. Bush wanted the "ownership society" and the Dems wanted low-cost housing/no redlining.

As this thing rolls out, and unravels, I think you will find that Fannie Mae and Freddie Mac are at the center of this. These agencies are, in reality, quasi government agencies (Sarah Palin was absolutely correct about this...smart gal!). Fannie and Freddie are Dem plantations. They both went overboard, to provide high-risk loans. The private market, believing that they could not fail, followed their lead.

Fannie and Freddie were highly regulated, at least on paper, however the Dems failed to step up to plate, despite the pleas from John McCain to do so.

This does not look good for Dems. Obama is up to his neck in this stuff. So is Barney Frank and Chris Dodd.

Just watch and learn, as this all unravels. The GOP and private market will take some knocks, but the Dems and government will get crushed.


Posted by OhlonePar, a resident of Duveneck/St. Francis
on Sep 22, 2008 at 4:57 pm

Gary,

Sarah Palin totally mistated what Freddie and Fannie are. Nice attempt to rewrite, but no cigar. Palin understands Alaska, but that has amazingly little to do with what goes on in the lower-48.

McCain, not Obama, is deep in this. A large majority of voters see the Republicans as more responsible for this than the Democrats. Again, it's very simple, it happened on Bush's watch. He had eight years, most of which with a Republican Congress, to change course and he didn't.

McCain wants Phil Gramm as his secretary of treasury, when Gramm's deregulation bill got us into this mess. McCain has a staff full of lobbyists and McCain was one of the Keating Five.

And, of course, the trend toward deregulation started under Reagan--it was sort of his baby.

McCain has spoken often and frequently in favor of deregulation--it's not hard to find.

Bush is now down at 19 percent--it's pretty clear where the blame is getting laid.


Posted by Gary, a resident of Downtown North
on Sep 22, 2008 at 5:44 pm

OhlonePar,

Nice try, but back atcha...no cigar.

Deregluation started under Jimmy Carter (airlines). It continued through Reagan, Bush I, Clinton, Bush II. We have seen an enormously positive effect from deregulation. The problem is Fannie Mae and Freddie Mac...these Dem instiutions tried to set in stone the anti-redlining calls of Clinton (through Janet Reno threats of Justice Dept. action), as well as 'affordable housing' calls of most Dems.

Fannie and Feddie are Dem preserves. The Congressional Black Caucus is completely in the tank with them. Unravel Fannie and Freddie, along with their lock-step political support, and you will see how this current crisis developed.

This is NOT, fundamentally, a free-market meltdown...it is a governmental meltdown, and the Dems are the ones who left most of the poop on the street, following the parade.

Sarah Palin, BTW, had a much better understanding of the situation than any Dem alive. McCain also understodd that these were governmental istitutions, and needed tough standards from the government enforced, but the Dems refused to see it this way. The Dems just wanted more free money/housing for their own.

The chickens are coming home to roost for the Dems.


Posted by OhlonePar, a resident of Duveneck/St. Francis
on Sep 22, 2008 at 7:28 pm

Gary,

This historical rewrite would work so much better if McCain's campaign manager hadn't headed the lobbying organization that fought better regulation of Fannie and Freddie, Gramm wasn't McCain's idea of good secretary of the treasury and if McCain hadn't been one of the Keating Five.

I mean, your claim is that Dems were involved. Unfortunately for you, McCain and people deeply involved in his campaign have been in the thick of it. McCain's been business as usual for decades.

You may think the blame's not being fairly assigned--but there's no way that this will play well for Keating-Five McCain.


Posted by Gary, a resident of Downtown North
on Sep 22, 2008 at 8:02 pm

OhlonePar,

The Keating-Five deal happened a long time ago. It involved four Dems and one GOP (McCain). McCain and John Glenn were cleared of any substantial wrongdoing, while three Dems were shown to have had substantially and improperly interfered with the FHLBB in its investigation of Lincoln Savings.

Fannie and Freddie are big time failures for the Dems. Obama cannot run away from this one. Just watch.

OP, you are usually pretty good on your homework, but you have been slipping recently. Getting a little nervous?


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