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John Wayne's Holster: Bankers Need a Kick in the Fannie
John Wayne's Holster
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Tuesday, July 29, 2008

Bankers Need a Kick in the Fannie

Today's Bankers Are Like Mr. Potter (It's a Wonderful Life)

Here in Taiwan, Typhoon Fung-Wong is blowing through town. As such, my plans of climbing Ali Shan in search of Formosan Magpies have been rained-out. So here I am in front of my computer listening to the Steve Miller Band while trying to catch-up on the news back home.

I stumbled on this report in the UK Telegraph stating that the US House of Representatives just approved a deal to bail-out the mortgage giants, Freddie Mac and Fannie Mae. Coincidentally (or perhaps not) Steve Miller's Take the Money and Run is playing in the background.

While I am outraged at this latest example of corporate welfare, the bail-out deal does not suprise me. As an American, I have come to expect such things.

All this Freddie & Fannie stuff can be traced back to the sub-prime mortgage fraud, the bursting of the housing bubble, and the criminal actions of the banking industry.

The banking industry lowered its loan requirements so that it could lend more money (i.e. collect more interest payments) from borrowers. Apparently a borrowers ability to repay was not fully taken into accout. I suppose the slogan of the bankers was "No income, no job, no assets....No problem!" On the surface, this seems like gross negligence on the part of banks, as they would have to assume a higher risk of default by these so-called "sub-prime" borrowers. In order to make it all work, the banks transferred their risk to third parties in the form of mortgage-backed securities (MBSs), structured investment vehicles (SIVs), and other forms of packaged debts. The bankers pocketed the money.

What happened to these sub-prime loans? For starters, many of the loans were provided as adjustable rate mortgages (ARMs) with long mortgage periods. With ARMs, borrowers frequently make low initial payments, but must assume a risk of a possible rise in the interest rates. Many sub-prime borrowers purchased properties with ARMs with the hope of selling those properties later at a higher price. But then, the housing bubble burst, and the value of many properties tanked. Many borrowers defaulted on their loans, leaving investors and some creditors who bought up the packaged debts on the hook.

You may be asking yourself how the bankers duped investors into buying these junk loans. They did so by packaging the junk with other "good" loans. They then colluded with securities ratings agencies to give them high ratings (A-AAA ratings). It's a process akin to making scrapple. Sweep up all the scraps, bones and cartilage, mix in a few pieces of real meat, throw in some spices for masking, grind it all up so that the individual components are indiscenrible, then sell it as USDA-approved grade A steak.

So, what to do now? With the current and looming loan defaults, someone is going to loose. Its either the investors and creditors (i.e. the big campaign contributors), or the little guy (i.e. me and you).

The Feds could let Fannie and Freddie go bankrupt, or take them over and sell off their assets. This would probably wipe-out some investors and creditors. But we must remember, they assumed that risk when they purchased the junk loans in the first place. The ripple from this would most definately shake-up the banking industry. Investors would lose faith in the solvency of banks, and would sell-off their investments and withdraw their cash. Banks that made bad investments or were poorly managed would go belly-up. In essence, this puts the banks (but not the bankers - they have already pocketed their cash and fled the scene) on the hook for irresponsible loan practices.

Alternatively, the Feds could present a "sweetheart" deal to the semi-private corporations, effectively bailing them out. Essentially, the Federal Reserve would simply turn on their printing machine, crank out a few billion extra dollars, and loan it to Freddie and Fannie at rates you and I would love to have for our own mortgages. This would give the loan giants enough money to remain solvent - at least for now. Incidentally, it would also add a few billion to the national debt, but whose counting. Oh yeah - I almost forgot to mention. This deal puts you, the taxpayer, as well as your childfren and grandchildren, on the line. You'll be making the interest payments.

Whom do you expect the government will choose?

I know. It's a stupid question. I just thought I would ask. As expected, Congress has already decided that it will be you and me.

The answer to the "What Would Jesus Do?" question would be to hold the fradulent bankers, and securites rating agencies accountable. Seize their assets and sell them off, drag them in front of a judge, and send them to prison. But Congress doesn't have the courage to do that. Doing so might hurt somebody's feelings, or, even worse, result in the loss of a campaign contribution.

And who said statesmanship was a thing of the past?


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