The Economy - Government for Sale?

[ç i p h é r]

Ok, so it turns out that I was wrong about something. A colleague pointed out to me today that someone in Congress apparently was speaking out about the pending financial crises 2 years ago. Guess who?

Documented and sourced here.

May 25, 2006

Sen. John McCain [R-AZ]: Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were "illusions deliberately and systematically created" by the company's senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight's report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae's former chief executive officer, OFHEO's report shows that over half of Mr. Raines' compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator's examination of the company's accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac--known as Government-sponsored entities or GSEs--and the sheer magnitude of these companies and the role they play in the housing market. OFHEO's report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO's report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

I urge my colleagues to support swift action on this GSE reform legislation.

And here.

This is the guy that Obama says doesn't understand the economy. Huh. Looks like he nailed it.

p.s. So who's with me on a congressional recall of biblical proportions?

[Mulu]

So McCain is partly responsible for private sector failings like Bear Stearns, AIG, Lehman Brothers and Washington Mutual (coming soon Wachovia and Ambac) due to a failure to regulate, and Obama is partly responsible for the Fannie/Freddie bail out due to a failure to regulate.

Looks like a push to me politically, and that's what the polls seem to be showing too. I'll tell you what the long term result will be, a *lot* more regulation and restrictions. This should be the death knell of the "regulations are bad" line of thinking.

And on the title topic:

McCain's list of bundlers, the center says, includes at least 69 people who have raised a total of at least $11.4 million for his campaign, making the investment industry his top source of bundlers.

The securities and investment industry is Obama's second biggest source of bundlers, after lawyers, and at least 56 people have raised at least $8.9 million, the center says.

[fluffmonster]

Neither candidate has a good grasp of economics, McCain or Obama. Note that was from 2006...McCain has flipped on many issues since then, erhaps once he determined he could get more votes if he was just willing to whore himself some more.

I'd still agree though, government intervention to increase home ownership is highly questionable and so too then Fannie Mae and Freddie Mac. There's a deep irony in that for typical free-market Republican ideology though...home ownership is the most concrete symbol of the American Dream. If you admit that not everyone is gonna get a house, then that is tantamount to admitting that not everyone has a shot at the American Dream. Even better, the resulting implication of that path, that society is unfair (i.e., not everybody in fact has boots), is avoided but only by making government an enabler of home ownership...which is basically admitting that attaining the American Dream is worthy of government help. At that point, its only a matter of deciding who gets the handouts.

[ç i p h é r]

Looks like a push to me politically, and that's what the polls seem to be showing too.

If they're just guilty of accepting campaign contributions from these parties, yeah it's a wash. But if they are or have been accepting economic advice from these folks (ie Jim Johnson and Franklin Raines of Fannie Mae in Obama's camp), it will be fully exploited.

I'll tell you what the long term result will be, a *lot* more regulation and restrictions. This should be the death knell of the "regulations are bad" line of thinking.

Why? Because more regulation by people who are bought by special interests is meaningful?

[Swift]

Why? Because more regulation by people who are bought by special interests is meaningful?

Australias banking and financial markets are far more regulated than the US and, perhaps not surprisingly, all advice from the RBA (Royal Bank of Australia) is that we are one of the best placed countries in the world to ride out the current turmoil without the impact other western countries are seeing ie giant financial corporations going belly up.

Im just throwing that out there. Government regulation of banking and financial markets is not always evil.

[Mulu]

Why? Because more regulation by people who are bought by special interests is meaningful?

You can set up regulations to be handled by independent agencies, they typically have "Commission" in their name to signify there is no one agency head, and put those commissioners under strong rules regarding what they themselves can invest in. They serve staggered terms of office and require bipartisan membership. Since they never run for office, they can't be given contributions. Any money that goes to them is an illegal bribe, and given the microscope they live under it simply doesn't happen, or rather always gets exposed if it does happen.

And that's how you fix corruption and lack of oversight: A regulatory agency headed by a bipartisan commission, that has a formative statute that gives them rulemaking authority so they create their own regulations. That and draconian measures equivalent to what the SEC has available allows you to keep most behavior in line simply through fear of getting caught and punished. That's for the private sector.

As to Fannie/Freddie, well like Fluff said you have to decide if homeownership is a goal worthy of federal intervention. Sounds like the amount of money flowing through those GSE's requires a very different rule system than their original set up. At a minimum their executives shouldn't have their earnings tied to performance, which sounds strange but it leads to cheating too often, and not just in GSE's.... This is Enron in the grey private/public zone.

In general, given the lack of ethics in executive management and how easy it is to cook the books, it looks like we need to come up with a whole new system of executive rewards and ethical oversight, without hamstringing decision-making. Quite the tightrope, but the hands-off approach is obviously failing. When the private sector fails, government intervenes. What's really amusing to me is the whole "government always does things wrong, let the private sector do what it wants" line of thinking. Whenever we let that happen, massive failure results.

Mortgage rebundling is the "Chinese lead toys" of the financial world. It's the result of too little oversight. And who gets to pay for their indiscretions? We do.

Treasury Secretary Henry Paulson on Friday sketched out a multi-faceted effort to confront the worst U.S. financial crisis in decades, outlining a program that could cost taxpayers "hundreds of billions" of dollars to buy up bad mortgages and other toxic debt that has unhinged Wall Street.
"This needs to be big enough to make a real difference and get to the heart of the problem," he told reporters as the administration asked Congress to give it sweeping powers.
He gave few details but said he would work through the weekend with leaders of Congress from both parties to flesh out the program, the biggest proposed government intervention in financial markets since the Great Depression.
The government steps were clearly welcomed by financial markets. As Paulson spoke, the Dow Jones industrials were up over 300 points and at one point had soared by 450 points.

Yes, investors were very pleased to hear that the average American is going to eat the cost of all that bad paper out there.

Looks like a push to me politically, and that's what the polls seem to be showing too.

If they're just guilty of accepting campaign contributions from these parties, yeah it's a wash.

I was actually referring to their both being involved in failing to regulate. McCain failed to regulate the private sector, Obama failed to regulate GSE's.

But if they are or have been accepting economic advice from these folks (ie Jim Johnson and Franklin Raines of Fannie Mae in Obama's camp), it will be fully exploited.

McCain has a slew of lobbyists advising him. No one seems to care. Amazingly, Americans seem to want solutions, not political spin. Bush finally pushed the country so far into the drink that the average American realizes we have serious problems that need solving. The likelihood of the voters turning to the same party that got them into this mess to get them out is fairly low, but nevertheless it is a close race, largely due to McCain being seen by many as an outsider to the Republican party. He isn't, but that's the perception.

Now, on to the cartoons!

[Mulu]

Oh those pesky "facts" that keep getting in the way of McCain's political ads.

Linking Obama to Ex-Fannie Mae Chief Is a Stretch
Saturday, September 20, 2008; A04

"Obama has no background in economics. Who advises him? The Post says it's Franklin Raines, for 'advice on mortgage and housing policy.' Shocking. Under Raines, Fannie Mae committed 'extensive financial fraud.' Raines made millions. Fannie Mae collapsed. Taxpayers? Stuck with the bill."
McCain campaign video release, Sept. 18

An already nasty presidential election campaign is getting nastier. The meltdown on Wall Street has touched off frantic attempts by both the McCain and Obama camps to secure political advantage and indulge in guilt by association. Over the past 24 hours, both campaigns have issued what are, in effect, video news releases attempting to show that the other side's "advisers" are somehow responsible for the crisis. The latest McCain attack is particularly dubious.

THE FACTS
The McCain video attempts to link Obama to Franklin D. Raines, the former chief executive of the bankrupt mortgage giant, Fannie Mae. It then shows a photograph of an elderly female taxpayer who has supposedly been "stuck with the bill" as a result of the "extensive financial fraud" at Fannie Mae.

The Obama campaign issued a statement by Raines on Thursday night insisting, "I am not an advisor to Barack Obama, nor have I provided his campaign with advice on housing or economic matters." Obama spokesman Bill Burton went a little further, saying in an e-mail that the campaign had "neither sought nor received" advice from Raines "on any matter."

So what evidence does the McCain campaign have for the supposed Obama-Raines connection? It is pretty flimsy, but it is not made up completely out of whole cloth. McCain spokesman Brian Rogers points to three items in the Washington Post in July and August. It turns out that the three items (including an editorial) all rely on the same single conversation, between Raines and a Washington Post business reporter, Anita Huslin, who wrote a profile of the discredited Fannie Mae boss that appeared July 16. The profile reported that Raines, who retired from Fannie Mae four years ago, had "taken calls from Barack Obama's presidential campaign seeking his advice on mortgage and housing policy matters."

Since this has now become a campaign issue, I asked Huslin to provide the exact circumstances of that passage. She said that she was chatting with Raines during the photo shoot, and asked "if he was engaged at all with the Democrats' quest for the White House. He said that he had gotten a couple of calls from the Obama campaign. I asked him about what, and he said, 'Oh, general housing, economy issues.' ('Not mortgage/foreclosure meltdown or Fannie-specific?' I asked, and he said 'no.')"

By Raines's own account, he took a couple of calls from someone on the Obama campaign, and he or she had general discussions about economic issues. I have asked both Raines and the Obama people for more details on these calls.

THE PINOCCHIO TEST
The McCain campaign is clearly exaggerating wildly in attempting to depict Raines as a close adviser to Obama on "housing and mortgage policy." If we are to believe Raines, he did have a couple of telephone conversations with someone in the Obama campaign. But that hardly makes him an adviser to the candidate himself -- and certainly not in the way depicted in the McCain video release.

[ç i p h é r]

Yeah, but Raines is a Democrat, which continues to illustrate that neither party nor ideology is immune from corruption and hypocrisy. What I don't get is, how is this guy not in jail? His behavior is criminal! (And why is Obama even asking him for ANY advice??)

On the point about Commissions, that's about oversight (as you also noted), so we agree at least that that much is needed to keep people honest and to protect consumers. Cheating breaks down the system. But you keep saying that more regulation - a *lot* more in fact - is needed, only you've failed to say what more we need. Well, what exactly?

To be honest, I'm against the tax payer bailouts. Why should we bail out these corporations? Sure, they'll declare bankruptcy (although I understand the AIG case is different in that their problem is their ability to conform to regulatory requirements not that they are bankrupt), but then they'll sell their assets and other companies will purchase them at a substantial discount, and life goes on.

Yeah, all of us are exposed in some way to this problem, either directly as shareholders or indirectly through holdings in funds we posses, but that's why investment portfolios are diversified. It's for mitigating risk. If you're not diversified, shame on you. Now you know better. And weren't these low income mortgages insured? That's not something you can get past underwriting...either you put down 20% or you pay insurance on your loan. This is something I've been meaning to look into but haven't had the time to. Where are the insurers?

Having said that, I do think that those responsible, like Mr. Raines who raked in millions in executive compensation, ought to open up their checkbooks and repay the shareholders they cheated. With power comes great responsibility. Holding these guys accountable will do wonders to curtail bad behavior. Bail outs I fear will encourage more of it.

Lastly, it seems rather noteworthy to me that despite the mess on Wall Street and all the doomsaying in the media, that the DOW is still above 11,000. Looking at the 5 year chart, we're still a full 2,000 points above 2003 levels, and...well...about 11,000 points above 1930 levels.

http://finance.yahoo.com/echarts?s=^DJI ... i;range=my

Yeah. It's the end of western civilization.

[fluffmonster]

Just because a source is partisan does not automatically make it wrong.

[Mulu]

Yeah, but Raines is a Democrat, which continues to illustrate that neither party nor ideology is immune from corruption and hypocrisy.

I don't think anyone has ever claimed otherwise.

What I don't get is, how is this guy not in jail? His behavior is criminal! (And why is Obama even asking him for ANY advice??)

Yeah, funny how rich, well connected people rarely get criminally prosecuted. Though it was Obama staffers that asked him for advice, not Obama himself. Sounded like he was one name on a long list of folks who got called.

But you keep saying that more regulation - a *lot* more in fact - is needed, only you've failed to say what more we need. Well, what exactly?

Not my specialty, though at a minimum reinstating the old separations between insurance, investments and savings sounds like a good plan. Beyond that the devil is in the details, but the old Buckley philosophy of "deregulate everything" is bust for good, which was my point.

We've regulated these industries successfully before. Sure, times change, investment strategies change, financial instruments change, but basic issues like risk management and capital savings stay the same. Simply requiring more capitalization and more disclosures of risk would go a long way.

To be honest, I'm against the tax payer bailouts. Why should we bail out these corporations? Sure, they'll declare bankruptcy (although I understand the AIG case is different in that their problem is their ability to conform to regulatory requirements not that they are bankrupt), but then they'll sell their assets and other companies will purchase them at a substantial discount, and life goes on.

Yeah, all of us are exposed in some way to this problem, either directly as shareholders or indirectly through holdings in funds we posses, but that's why investment portfolios are diversified. It's for mitigating risk. If you're not diversified, shame on you.

Now now, my understanding is that a lot of pension plans are affected. People don't choose how their pension plans get invested typically, beyond "Plan A, B or C" which are all chosen by the provider. Same with annuities and many other financial assets. Letting Joe Elder get screwed out of his pension/annuity because someone else had a reckless investment strategy is hardly fair to Joe Elder, especially when he was likely sold the asset with promises that no high risks would be taken with his money.

Philosophically I'm with you actually, I think "free market" means if you invest and fail, screw you. The problem here is the people making the actual investment decisions aren't the people getting screwed. Those people made a lot of money trading junk paper, and can walk away from this mess rich if they want. It's everyone else who ends up holding the bag. If you're only guilt is trusting a bank or an insurer not to gamble your money away, that's not much wrongdoing. What's left, stuffing your mattresses?

Now you know better. And weren't these low income mortgages insured? That's not something you can get past underwriting...either you put down 20% or you pay insurance on your loan. This is something I've been meaning to look into but haven't had the time to. Where are the insurers?

Welcome to sub-prime mortgages. Now you know why they are so risky.

Having said that, I do think that those responsible, like Mr. Raines who raked in millions in executive compensation, ought to open up their checkbooks and repay the shareholders they cheated.

I'm with you comrade! POWER to the worker! Let's do it to all the corporate bad guys. How about GM execs who shipped all those US jobs overseas and made a fortune doing it? How about the oil companies? The list goes on and on. Heads should roll! Welcome to socialism, we're glad you finally saw the light!

With power comes great responsibility. Holding these guys accountable will do wonders to curtail bad behavior. Bail outs I fear will encourage more of it.

Hence Fluff's lecture on Moral Hazard. It was a bit too academic for a gaming community though.

Lastly, it seems rather noteworthy to me that despite the mess on Wall Street and all the doomsaying in the media, that the DOW is still above 11,000. Looking at the 5 year chart, we're still a full 2,000 points above 2003 levels, and...well...about 11,000 points above 1930 levels.

Well, it certainly rallied after the Fed claimed the rest of us get to eat all that bad paper out there. Would you like some Republican Regret sauce with your rebundled subprime mortgages?

Yeah. It's the end of western civilization.

The doomsayers are talking about what could happen, assuming the Fed does nothing. That's not a possible scenario, of course, so it's just speculation.

Here's some interesting asides:

1. Current price tag of the big bailout is .7 trillion dollars. How much was national healthcare going to cost again? Not that much.

2. The Bush Administration originally told us that the Iraq War would pay for itself. We'd even make money off of it due to the lowering price of oil (they actually said that). Now this same administration is saying the .7 trillion dollar bail out will... guess what? Pay for itself. In fact we'll probably *make* money off of it when the Fed resells all that totally worthless paper. If the paper was worth anything, the banks would keep it.

So, the big question is, who here is dumb enough to believe the Bush administration a second time?

We may have no choice but to eat the paper, to maintain liquidity in the markets and all that. But it's going to cost us, a lot. Enough that we'll need to raise taxes to support it without spiraling into even more debt. Of course, spiraling into even more debt is precisely how the Bush Administration plans to pay for it all, which will weaken the dollar and cause oil and other commodities to cost even more.

Welcome to Republican governance. By the rich, for the rich.

[White Warlock]

Yeah, but Raines is a Democrat, which continues to illustrate that neither party nor ideology is immune from corruption and hypocrisy.

And your point?

To be honest, I'm against the tax payer bailouts. Why should we bail out these corporations? Sure, they'll declare bankruptcy (although I understand the AIG case is different in that their problem is their ability to conform to regulatory requirements not that they are bankrupt), but then they'll sell their assets and other companies will purchase them at a substantial discount, and life goes on.

The solution would have been if private investors went in and attempted a buyout, but this didn't happen. The U.S. entering in with this loan is designed to buffer the impact of AIG going poopy. The U.S. will own 73% of AIG, and will most likely follow up with asset sales, slowly dissolving AIG and regaining the 85 billion loan via the proceeds. At least that's what the Bushies are selling us.

Yeah, all of us are exposed in some way to this problem, either directly as shareholders or indirectly through holdings in funds we posses, but that's why investment portfolios are diversified. It's for mitigating risk.

Risk to the individual, yes, but a big blow impacts the market trends, which is more to the point of all this. Bushies are selling it as if they want to protect the taxpayer, but what they really want to do is soften the blow to the market.

Bail outs I fear will encourage more of it.

On this point, i wholeheartedly agree. Bailouts say, "It's okay to fuck things up, because we'll come in and cover your losses."

However, these bailouts are a fix to what should have been done in the first place, which is regulate and oversee. The market is full of gamblers, but the problem is... they're not gambling their own money. What is needed right now, and what was needed a decade ago, is a stopper on high risk behavior. Hoping for big profits in a short period of time has driven the market to the state it is in now. Well, plus other things that i'm not altogether knowledgeable of.

Fact is, i'm not an economist or stock market guru, and i would be surprised to find anyone in this community that is. But, i do think it is interesting that if there is, he/she is not participating in these discussions.

Lay speculators posing lame answers. That's what we are, right?

[mxlm]

Bail outs I fear will encourage more of it.

On this point, i wholeheartedly agree. Bailouts say, "It's okay to f*sk things up, because we'll come in and cover your losses."

If this were China, we'd totally get to execute a bunch of highly placed government officials and/or corporate officers. That'd be sweet.

But then we'd be China. Which would be less sweet.

[White Warlock]

friggin' comedians.


And hi mxlm, you playing ingame nwn1 or nwn2, or just waiting it out? And if ingame, what's your pc name(s)?

[ç i p h é r]

I'm with you comrade! POWER to the worker! Let's do it to all the corporate bad guys. How about GM execs who shipped all those US jobs overseas and made a fortune doing it? How about the oil companies? The list goes on and on. Heads should roll! Welcome to socialism, we're glad you finally saw the light!

You don't have to be a socialist to believe in accountability. You just need to possess business ethics. If someone cheated the system to make their money, that money was never theirs legitimately to begin with. So demanding it be repaid is not the same as advocating wealth redistribution. What I'm advocating is corporate responsibility.

I still very much believe that people should be rewarded justly for their hard work (that includes proper wages for American workers). I believe that is the responsible way to run a business, and in the long run, builds the loyalty of your work force, which offers lots of advantages, from reducing hiring and training costs to increasing net productivity. But working hard is a choice; Not everyone wants to do it. Getting rich is a desire; Not everyone has it. That's the simple truth. So the idea that we should tax the hardest working folks to subsidize the least productive in society just does not square with my beliefs. At best, it rewards mediocrity.

I know we both want the same thing. We just have different ideas on how best to get there.

And your point?

That corruption and hypocrisy does not discriminate by party. It's on both sides of the isle.

Lay speculators posing lame answers. That's what we are, right?

Hey, speak for yourself! (j/k )

[Mulu]

If someone cheated the system to make their money, that money was never theirs legitimately to begin with.

The older I get, the more I realize that the only way to make big money is to cheat. Obviously hiding debt and other accounting shenanigans are flat out fraud, but there are plenty of other ways to cheat the system legally. Laying off a lot of workers to create a false sense of short term profits makes a lot of money, but potentially damages the company in the long term as it reduces its productivity. The same can be done by failing to pay for maintenance, and of course the biggest corporate crime in the last decade was the purposeful bankrupting of pension fund accounts. By transferring all the capital from the pension funds to the corporations, those executives made billions of dollars overall, at the expense of the financial security of pensioners throughout the country who in many cases lost their entire retirement. Good thing we still have Social Security. It was all perfectly legal, of course, once the Republicans in Congress under Bush changed the laws to make it legal, but was that money really legitimately theirs to begin with? Most pensioners, and I suspect most Americans, would say, "no."

So demanding it be repaid is not the same as advocating wealth redistribution. What I'm advocating is corporate responsibility.

Under our current system of laws what you're advocating is redistribution of wealth, since those executives have no legal duty to pay the money back. Business Judgement Rule and all that. Executives are largely immune from penalty for their decisions, except in the case of provably illegal conduct, and even then it's discretionary with the SEC whether or not to pursue the charges. Since they became Republican majority, they rarely prosecute. Funny that.

So the idea that we should tax the hardest working folks to subsidize the least productive in society just does not square with my beliefs. At best, it rewards mediocrity.

Well, the Straw Man there is the "hardest working folks" line. Attorneys are the hardest working folks I've seen, we'll put in 90 hours in a week without blinking (and bill 180, now that's some hard work! ). Corporate executives play golf. Back when I was young and poor and doing Community work, I'd put in 60-70 hours a week for minimum wage, which as anyone knows you can't live off of, night and swing shifts for that matter, (and walking uphill both ways! ) Plenty of folk slave away for pennies. They may not be working smart, as their opportunities are limited especially if they have a criminal background or lack education, or both, but they sure are working hard.

As for social programs, which cost pennies compared to say unnecessary wars or bank bailouts, they are more than just a safety net or a "reward for mediocrity." Social programs that say help prevent teen pregnancy actually help to break the cycle of poverty. Those girls can get more education and work, thus becoming far more productive than if they were sitting in an apartment with their WIC checks. Social services for the poor isn't just a free lunch you know, it's methods of making them productive members of society. It's drug rehab, birth control, job training, life skills training, crime prevention, etc. Cut funding, and they end up on the welfare rolls for sure. So really, according to your philosophies, you should *want* to pay taxes and have that tax money going into social programs. It makes America more productive in the long run. Cut services and child poverty rates go up, which are themselves strong predictors of future crime rates. Poor kids with no options turn to crime. It costs far less to prevent a criminal than it does to house one in a prison, and that's not even including the costs inflicted by the underlying crimes that put them in prison.

Of course, illegal immigration also suppresses wages and makes crime more attractive. Punish the employers who hire illegals, and the unemployment rate will drop, along with the crime rate. Idle hands and all that.

I know we both want the same thing. We just have different ideas on how best to get there.

Yes, mine are proven to work, yours are proven to fail.