Grassroots rage building over the federal bailout

It's one thing to see "no bailout" tags at the end of blog comments, but with a growing backlash against a federal bailout of the financial industry -- which is apparently trying to add everything but the kitchen sink in with failed mortgages -- it's easy to see why Congress can't seem to agree on a solution. Columnist Lou Barnes takes it on:

Any large-scale federal financial rescue was certain to face political chaos. However, within hours of rollout last Thursday this rescue collided with two linked and disastrous forces that may yet defeat immediate rescue...

Most grown-ups know that it's a mistake to ask a group to vote on an important proposal without prior discussion. You wouldn't spring something big on your PTA, your HOA or your book club and demand an immediate approval. You wouldn't ask a Cub Scout troop to vote on a field trip without some testing of the water.

Hank Paulson would. Hank has had 13 months to prepare a contingency plan in case market solutions to this crisis failed, and quietly to explore alternatives with Congress. Instead, he dumped on Congress a three-page sketch of a highly technical and questionable proposal. Tuesday's hearings in the first minutes revealed bipartisan, confused, angry and incredulous Senators, and an ill-prepared Paulson...

Over last weekend another force erupted all over the country: native, grassroots rage at a bailout that would leave all the big institutions in place -- officers, directors, stockholders, all -- and offer to taxpayers the absurd promise of payback from hundreds of billions of trash that the institutions couldn't unload on anyone else.

You tell me your precious markets will melt down without this? Why do I care? Your stock market can go to goddamn zero on Monday, and then you can come down here with me to find out how it feels not to be able pay the bills. More than half of Americans have no stake in these markets, no savings at all; and there is a political price to be paid for extreme inequality of income.

This bailout, incomprehensible to civilians and many experts and senators, should have taken ownership in the institutions involved. Proper vetting to Congress months ago would have gotten that done. Instead, the same ancient American forces that ignited the Palin phenomenon, Jefferson-Jackson-Bryan-LaFollette populism, have mobilized an anti-bank, anti-smarty-pants, street-level riot not seen in modern times.

Completing the scene: President Bush's nasty little speech on Wednesday, assigning blame and taking no responsibility; Senator McCain's grandstand play on economic issues he's said for decades he's not any good at; and Senator Obama's silent tip-toeing along.

Columnist Lou Barnes on the proposed fed bailout

So what does the ever-opinionated, pull-no-punches Lou Barnes have to say about the proposed fed bailout to save Wall & Main Street? From his latest column:

Mark this day: the worst of this crisis has passed. However, not yet the halfway point in time: we are thirteen months into this wreck, and you’ll sure as hell feel credit-market distress thirteen months from now. The greatest risk has passed.
Until yesterday the nation labored under the illusion that this crisis was a financial matter -- banks and markets thrashing around, remote from Main Street, something that would either solve itself or be calmed by usual means. In reality, of course, the financial matter was not remote and had been hopelessly lost by August, 2007.
Now this crisis is officially public property, in the political sphere, put there by final disaster on Wednesday, formally acknowledged today by the Fed, the Treasury, the President, both houses of Congress, both parties, and both Presidential candidates...

The authorities, including White House and Congress, have obviously been working on today’s fix for months. Fed examiners have been inside securities firms since June for the first time ever, “lifting the kimono” to discover the Street’s secret losses. Thus we have an initial funding amount; not enough, but most to be recovered one day.
The authorities could not go public with planning until the market damage was so severe that a majority of both parties in Congress was willing to go along. The most difficult part of the journey ahead: helping the American people to understand, and to stay together despite contrary charlatans by the thousand.
Top honor: to Perfesser Bernanke. Quiet, no grandstand, the technician with the life-study knowledge of 1930 and the determination to prevent 1932.
An Honorable Discharge, no medal, to Hank Paulson. You hire an investment banker to look around corners for you. Relentlessly surprised, annoyed at the waste of his valuable time, Hank has only recently discovered that there are corners.
Medal of Honor: Tim Geithner, NY Fed Prez. If we are very, very lucky, this extraordinary man will stay in public service for a while longer.
The Boobs... oh, my. Start with the CEOs and boards of the failed firms. Name them, publicly humiliate them, and then shun them. Forbid them ever again to participate in a public company. That’s authentic “moral hazard.”

If only.

What will happen to Fannie Mae and Freddie Mac?

Want to get a good (and opinionated, but I like opinionated) summary of how Fannie and Freddie got into their current mess and what's likely to happen? First, be sure to check out Lou Barnes' latest edition of Mortgage Credit News:

The Fannie-Freddie story will be widely mis-reported, especially in those journals hostile to housing or to any intervention by government into markets.
The real story is a tale of public policy mangled by everybody connected to the two Agencies in the last 15 years -- both parties, two Administrations, eight Congresses, and real estate- and mortgage-industry lobbying...

The real story is very good news. Fannie and Freddie have high-quality portfolios, the only trash the “affordables” forced on them by Congress. A government takeover would wipe out stockholders, but might not cost a dime. Then the original charters will be restored: upon return of good times, both outfits will gradually sell their portfolios....

I have believed since August that a nouveau Resolution Trust Corp would be required to extract the worst of the assets, take stock in the institutions, and work out the trash over a long time. That extraction will work (we’ve done it many times), but I’m a tad nervous that we waited too long, damage from credit starvation now may be hard to stop, especially in housing.
Some good news: the same Congresspersons who insisted all fall and winter, “No bailouts! Punish the lenders!”, by this weekend began a different chorus. “Necessary evil... Regrettable but unavoidable.” About time, guys; and I hope in time.

To me, the knee-jerk 'no bail-out' crowd never seemed the grasp how intertwined the mortgage crisis is to the overall economy. After all, why learn about how the world works when you can simply shout out platitudes instead (you know, like the politicians!).

So where are we at now with the two mortgage giants? The Wall Street Journal summarizes in this article:

The government headed into the weekend deliberating the state of struggling mortgage giants Fannie Mae and Freddie Mac, with Treasury Secretary Henry Paulson insisting that any potential rescue plan not benefit the companies' shareholders, according to people familiar with the matter...

The discussions at Treasury highlight the dilemma created by the financial crisis gripping the U.S: Some institutions are considered too big to fail, but propping them up could erode the market's incentive to properly judge risk by offering investors a false sense of security.

After a week of near panic among shareholders of the two companies -- and a stomach-churning day on Wall Street Friday -- the next big test will come Monday when Freddie Mac is due to sell $3 billion of short-term debt. An unsuccessful sale could be a major blow to investor confidence. If the administration were to intervene, it could do so before markets opened that day, according to a person familiar with the deliberations...

How any rescue might be orchestrated remains unclear. The administration doesn't expect the firms to fail and it is "not talking about nationalizing" the struggling mortgage giants, according to a person familiar with its thinking. Mr. Paulson issued a written statement Friday saying that the administration's "primary focus is supporting Fannie Mae and Freddie Mac in their current form."

One possible option would have the government buy a chunk of Fannie and Freddie's preferred stock with terms that dilute the equity of common shareholders. The Federal Reserve could support Fannie Mae or Freddie Mac in a short-term funding crisis through its lending operations, which were extended to investment banks in March with the downfall of Bear Stearns Cos. A spokeswoman said Friday the Fed hasn't discussed that possibility with either company...

Investors are worried the firms will suffer more losses as mortgage defaults rise. Stock-market investors are also worried the companies will need to raise significant amounts of capital to cover those losses. For investors, that means the value of their ownership stakes in the company will be cut. Bond investors continue to lend to both companies, though they are also demanding slightly higher interest rates.

If a rescue becomes necessary, Mr. Paulson does not want to help the shareholders because of the "moral hazard" it would create -- desensitizing investors to risk because they believe the government will bail them out. It's a similar position he took during the government-orchestrated rescue of Bear Stearns by J.P. Morgan Chase & Co...

The crisis has been exacerbated by the strange hybrid nature of the two companies, which have prospered because they are seen as having the implicit backing of the U.S. government. Chartered by Congress to ensure a steady flow of money into housing finance, they can borrow cheaply because investors believe the government probably would rescue them in a crisis. Yet they are owned by private shareholders who want profit growth and dividends.

The implicit guarantee has allowed the companies to borrow at lower rates and buy more mortgages, providing a benefit to shareholders. There's a belief among many politicians and officials that it is the shareholders -- not taxpayers -- who should bear those risks because they benefited greatly in the past from the implied government backing.

The government has increasingly leaned on the so-called government-sponsored enterprises to provide stability to a housing market crippled by falling home prices and banks too nervous to lend...

"Do a little examination and ask yourself, 'What do you think the housing market in the U.S. would look like without the GSEs now?"' Richard Syron, Freddie's chairman and chief executive, said earlier this year.

The Bush administration has long worried about the systemic risk posed by the companies. The administration has pushed for a regulatory revamp, including a new, more powerful regulator to oversee them. Long-awaited legislation that would do that passed the Senate on Friday.

So how exactly do these two mortgage giants work and what would be the consequences of a bailout? A slideshow from the New York Times helps explain.

Sometimes economists on housing have no clothes

In his latest Mortgage Credit News, columnist Lou Barnes takes Dr. Robert Shiller to task for predicting a 30% decline in home prices but offering no specifics:

The media are having a wonderful time mis-reporting housing conditions, ooing and ahhing every time Robert Shiller shouts “Fire!” in the theater. This week he predicted (again) a “30% decline in housing prices.” All of them, Robert? Uniformly? Average? Do the math: if half the nation’s homes stay price-flat, the other half must fall 60%. Is that it? Or did you mean to say decline 30% in a few places? Some individual projects are off more than 60% right now (an FL condo or two... AZ and CA land), but the worst dozen mini-metro areas have yet to decline as much as 20%.
In authentic data, OFHEO found that home prices measured by appraisal and weighted by location (CA more than ND; NY more than AZ and NV combined...) rose .6% from January to February. Sales of existing homes are sliding gently, but still moving at a five million annual clip. Sales of new homes are off 37% in the last year, down to a half-million, but that is good news -- the less new inventory, the better.

That's the problem with economists who try to opine on real estate markets without ever having worked in the trenches. In many cases, they simply don't know what they're talking about and the media, full of over-worked and/or lazy reporters, return to the same feedstock of quotes (i.e., Mark Zandi, Robert Shiller) for a line or two to make their story appear credible. Readers, not knowing any better, then believe it and act accordingly, apparently turning to guns and religion as salves.

But Barnes isn't finished yet with the media:

Yelling “Fire!” is a bad idea, but so is telling the audience to stay seated when smoke is pouring from the ventilator. Headline stories all week long: the Crunch is over, credit markets are improving. Irresponsible nonsense.
Distress is measured by interest rate spreads between safe stuff and not, and availability of credit. We have seen nothing more than a pullback from panic: the 2-year T-note has run up from 1.70% to 2.36%, sensible as the Fed at 2.25% is about to pause its rate cuts (keep some dry powder, guys). The Treasury/junk spread has contracted from no-market 8.6% to merely disastrous 7%. Retail mortgages are still 2.50% above Treasurys, almost a point out of line, and no real market for Jumbos or any other securitized credit. Tax-exempt munis paid 1% over taxable Treasurys last month, and now pay the same -- improving from schizophrenia to clinical depression. The international bank-to-bank Libor spreads are still widening...

Lost in housing and “subprime” myopia, and domestic navel-gazing: the global rise of terrible inflation, nothing like it since the 1970s. $120 oil will have its consequences. Here, wages capped by foreign competition, food and energy inflation is slowing the economy; Asia/Emerging are in a runaway spiral. Recent annualized figures: China 9%, India 7% (doubled in six months), Philippines 6.9%, Vietnam 19.4%, Singapore 6.5%, Russia 12.7%, South Africa 9%, Saudi Arabia 8.7% (highest since the ’82 oil spike).
There are only three antidotes: the mad good fortune of a commodity collapse, or central-bank induced slowdown, or the ultimate violence of market-induced slowdown.