Bail Outs

When the boat is sinking, the natural thing to do is bail out the water. In that case, you have a definition of exactly what is sinking the boat.

When the economy is sinking, there are the same instincts, to bail it out, but the definition of what is sinking the economy isn't so well defined.
It seems the problem(s) in the economy have either been misdiagnosed, or else it has become a political game of tail covering. At first, there was the stated emergency to buy up the illiquid mortgage assets. The 700+billion-dollar emergency bailout package finally cleared congress after enough pork was added to it to buy the votes. Since the act was passed on October 4, 2008, Paulson has now decided to not buy up the illiquid assets.

The fact is I don't believe he even knows what needs bailing. His indecision and lack of planning is causing havoc in the markets. Right now, the boat is listing, he has lost an oar, and his bucket has a hole in it.

The democrats are trying to figure a way out of the mess that keeps them from getting the blame, but the history of this mess has a trail that does not let them off the hook. They are the proud Pa Pa of this saga and trying to obfuscate and otherwise muddy the waters does not make them any less culpable.

Jimmy Carter encouraged loans to ineligible borrowers with the Community Reinvestment Act of 1977. There is no doubt that the act had the best of intentions, but Carter's poor judgment and failure to consider the consequences turned it into a National nightmare. Like all Liberals, you have to judge them by their intentions rather than results.

As you read the following text, keep in mind the Democrats such as Barney Frank declared in 2003 that Fannie Mae and Freddie Mac were in good shape. But his personal relationship with an executive at Fannie Mae may have been clouding his vision. The Democrats have also been on the receiving end of political donations from Fannie Mae and Freddie Mac. Those institutions were essentially a piggy bank for Democrat politicians. But their heart was in the right place, they only wanted housing for their minority and poor voters. (As long as the taxpayer was going to have to pay for it.) Understand that there are numerous proposals out there to help this group stay in their homes. The Democrats portray this demographic as victims. Just ordinary folks who were taken advantage of by the mean old predatory lenders. The following text gives the picture of how preferential treatment for this demographic has put us so far behind the eight-ball.

In order that you can judge for yourself, I have copied some of the pertinent passages from Wikipedia about the Community Reinvestment Act and its progress through the years. To read the full text, follow the link provided.

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

A Brief Description of --The Community Reinvestment Act (CRA)

The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. The Act was intended to reduce discriminatory credit practices against such neighborhoods, a practice known as 'redlining'. The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation. To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions.

Enforcement:
CRA mandates that all banking institutions that receive FDIC insurance be evaluated by the relevant banking regulatory agencies to determine if the institution has met the credit needs of its entire community in a manner consistent with safe and sound operations. The CRA does not list specific criteria for evaluating the performance of financial institutions. Rather, the law directs that the evaluation process should accommodate the situation and context of each individual institution. The law also does not require institutions to make high-risk loans that may bring losses to the institution; instead the law emphasizes that an institution's CRA activities should be undertaken in a safe and sound manner. There are no specific penalties for non-compliance with the CRA, unless there is found to be a violation Equal Credit Opportunity Act. An institution's CRA compliance record is taken into account by the banking regulatory agencies when the institution seeks to expand through merger, acquisition or branching.

The same federal agencies that are responsible for supervising depository institutions are also the agencies that conduct examinations for CRA compliance. These agencies are the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). The Federal Financial Institutions Examination Council (FFIEC) coordinates inter-agency information about the CRA. Information about the CRA ratings of individual banking institutions from the four responsible agencies (Federal Reserve, FDIC, OCC and OTS), is publicly available from the website of the FFIEC. These ratings were first made available by the Clinton administration to enable public participation and public comment on CRA performance. In 1981, to help achieve the goals of the CRA, each of the Federal Reserve banks established a Community Affairs Office to work with banking institutions and the public in identifying credit needs within the community and ways to address those needs.

CRA regulations give community groups the right to comment on or protest about banks' non-compliance with CRA, including by alleging violations of the Equal Credit Opportunity Act. Such comments could help or hinder banks' planned expansions. Groups at first only slowly took advantage of these rights. Regulatory changes during the Clinton administration allowed these community groups better access to CRA information and enabled them to increase their activities.

The Critics:
In Congressional debate on the Act, critics charged that the law would "distort credit markets, create unnecessary regulatory burden, lead to unsound lending, and cause the governmental agencies charged with implementing the law to allocate credit."

Later Developments:
In October 2000, in order to expand the secondary market for affordable community-based mortgages and to increase liquidity for CRA-eligible loans, Fannie Mae committed to purchase and securitize $2 billion of "My Community Mortgage" loans. In November 2000 Fannie Mae announced that the Department of Housing and Urban Development (“HUD”) would soon require it to dedicate 50% of its business to low- and moderate-income families." It stated that since 1997 Fannie Mae had done nearly $7 billion in CRA business with depository institutions, but its goal was $20 billion. In 2001 Fannie Mae announced that it had acquired $10 billion in specially-targeted Community Reinvestment Act (CRA) loans more than one and a half years ahead of schedule, and announced its goal to finance over $500 billion in CRA business by 2010, about one third of loans anticipated to be financed by Fannie Mae during that period.

I hope that by reading the chronology of the events since 1977 gives you a better understanding of the problems in Washington. The bureaucrats held a big club over the lending institutions heads which led to even more shaky loans. The political payback to the minority community has created a crisis both here at home and abroad. As stated in a previous column, everybody was dancing, but the fiddler was guarding the door, and he and the piper were going to hold everybody hostage until they got paid. A lot of people and institutions bought those mortgage backed securities that were financing everything. But now, it is time to pay for our reckless abandon. I just hope that you understand why it happened.

Cheers,

-Robert-