'How did we get here?'

"The Reckoning: White House Philosophy Stocked Mortgage Bonfire," posted Saturday on the New York Times website, is an exhaustive report that attempts to answer President Bush's own question, wondered aloud Sept. 18 when the credit markets froze up, "How did we get here?"

A big part of the answer, according to the article, is housing.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk....

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities.... But his housing policies and hands-off approach to regulation encouraged lax lending standards....

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away....

There's much, much more to the article, but among the warning signs along the way:

Typically, as home prices increase, rental costs rise proportionally. But Mr. Thomas [Jason Thomas, an economic analyst for President Bush] sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Mr. Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

It was not the Bush team’s first warning. The previous year, Mr. [Lawrence B.] Lindsay, the former chief economics adviser, returned to the White House to tell his old colleagues that housing prices were headed for a crash. But housing values are hard to evaluate, and Mr. Lindsay had a reputation as a market pessimist, said Mr. Hubbard [Al Hubbard, Bush’s former chief economics adviser], adding, “I thought, ‘He’s always a bear.’ ”

In retrospect, Mr. Hubbard said, Mr. Lindsay was “absolutely right,” and Mr. Thomas’s charts “should have been a signal.”

Instead, the prevailing view at the White House was that the problems in the housing market were limited to subprime borrowers unable to make their payments as their adjustable mortgages reset to higher rates.

They weren't the only ones who thought the subprime problem would be contained to a small segment of the market -- I recall talking to several housing experts who assured me the same thing -- and that expanding homeownership was a fine goal. If you can put party politics aside, I think there's a lot to be gleaned here on how we got to this point.

--Lauren Beale

Thoughts? Comments?   

Obama wants 90-day foreclosure freeze at bailed out banks

News item from the campaign trail this morning, from the A.P. via KTLA.com:

"Democratic Barack Obama on Monday called for more immediate steps to heal the nation's ailing economy, proposing a 90-day moratorium on home foreclosures at some banks and a two-year tax break for businesses that create new jobs."

More on the foreclosure freeze part of the proposal:

"Obama said that banks participating in the federal bailout should temporarily postpone foreclosures for families making good-faith efforts to pay their mortgage. 'We need to give people the breathing room they need to get back on their feet,' he said, adding that families living beyond their means share some of the responsibility.

I'll add to this post with more details as they become available.

--Peter Viles

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Photo Credit: A.P.

 

Barack Obama: John McCain's mortgage bailout 'costly and out of touch'

On further review, the Barack Obama campaign has chosen to criticize John McCain's surprising call last night for a new homeowner bailout under which the federal government would buy $300 billion worth of underwater mortgages and issue cheaper, government-backed mortgages in their place.

The Obama campaign's initial response Tuesday was hardly critical: "Bill Burton, a spokesman for the Obama campaign, said the idea was not a new one and noted that the Illinois senator had raised it." Today, however, the Obama campaign went on the attack:

Now that he's finally released the details of his plan, it turns out it's even more costly and out-of-touch than we ever imagined," the Obama campaign said in a statement. John McCain wants the government to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don't recover. The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud.

If you want to read more about the McCain plan -- and the "many mysteries" it raises, read Mark Lacter's quick take at LA Biz Observed.

Back story: Here's the McCain campaign's description of the plan, which it calls The Homeownership Resurgence Plan. Highlights: To be eligible, borrowers would have to "prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment)." The McCain campaign argues the recent bailout bill, plus the Fannie-Freddie takeover, plus last summer's housing bill give the government the authority to buy mortgages and replace them with cheaper, government-backed mortgages.

Keep reading below for a transcript of the portion of last night's debate in which McCain first floated the idea.

McCain: I'll buy your mortgage

Interesting curveball from Sen. John McCain in the presidential debate: an economic proposal he's either just come up with, or has been waiting to unveil. From the Los Angeles Times:

McCain offered one of his most significant proposals of the campaign, saying he would order the Treasury secretary to immediately "buy up the bad home loan mortgages in America and renegotiate ... at the diminished value of those homes, and let people be able to make those ... payments and stay in their homes."

McCain's $300-billion plan, a turnabout from an earlier position, would require a radical shift in the government's approach. It raised several questions the McCain campaign could not immediately answer, including what its potential impact would be on efforts to remedy the global credit crisis.

From a separate Times' article on the proposal:

McCain's campaign issued a 1½-page fact sheet to explain his call for the massive federal intervention, which it called the American Homeownership Resurgence Plan. The campaign noted that the $700-billion financial rescue package approved by Congress last week gives the Treasury Department authority to directly buy mortgages, but added, "It may be necessary for Congress to raise the overall borrowing limit."

The Obama campaign, evidently wanting a piece of the idea, said Sen. Barack Obama had already suggested the Treasury use its new powers to buy individual mortgages.

From the New York Times:

Mr. McCain sought to break through by highlighting a proposal under which the Treasury Department would buy up mortgages that had gone bad, and in effect refinance them at prices homeowners could afford.

Your thoughts? Comments? I'll add more details and reaction to this post as the day goes on.

-- Peter Viles

Photo credit: Associated Press

On bailout, presidential debate was a disappointment

I watched last night's presidential debate hoping to learn whether either candidate favors the Bush administration's push for an immediate $700 billion bailout. To my disappointment, I didn't hear clear answers. Does either of these guys favor the Paulson plan? Got me.

The L.A. Times watched the debate and concluded: "Neither would commit without knowing the details."

The New York Times, watching the same debate, concluded: "Both expressed general support for the concept underlying Mr. Bush’s proposal, to buy as much as $700 billion in toxic securities as long as the program meets certain criteria of transparency and accountability."

I'm not sure that's true -- even though Sen. John McCain said last night he would likely vote for the bailout, I haven't heard him support the Paulson plan. He has given himself wiggle room to oppose a bailout deal built on the Paulson plan, and instead side with House Republicans in opposing the bailout.  This would allow him to campaign as the anti-bailout candidate in the final weeks of the campaign, a potentially potent appeal to ticked-off middle class voters.  Not wanting to be alone in his support of the bailout -- that is, not wanting to be the pro-bailout candidate -- Sen. Barack Obama has also hedged.

Last night was just more hedging. More dancing. Profiles in courage this was not.

I fully understand that both candidates have laid out various conditions and principles they believe are necessary in order for the Paulson the plan to be acceptable (protection for taxpayers, limts on CEO pay, oversight). For lack of a better word, I'll call these concerns "lipstick."

But what about the pig? The pig is the Paulson plan: $700 billion in taxpayer money for government purchases of distressed assets, a messy, historic, controversial, and risky use of government money. There is no question it is a big, fat, ugly pig in the eyes of many voters.

Are these guys for it or against it? And do they think it will work? And what is so special about $700 billion? Why not $525 billion? Why not $900 billion? Here's the debate transcript -- by all means, read it and let me know your thoughts.

Prior to the debate, Calculated Risk laid out its hopes for the bailout discussion, writing:

I'd like to see both Senators McCain and Obama explain the economic problem, why they see a need for the government to be involved (or not), what the purpose of the plan should be, and specifics on the plan they would propose or support.

I didn't hear either candidate address any of those questions.

As of Saturday afternoon, there is no indication the White House and the Democratic leadership are moving away from the core of the Paulson plan. This is from The New York Times' report Saturday afternoon indicating progress is being made in congressional negotiations:

Officials said the core of the proposal, put forward a week ago by Treasury Secretary Henry Paulson, remained intact: The government would purchase up to $700 billion in troubled assets from financial firms as a way to free their balance sheets of bad debts and to help restore a healthy flow of credit through the economy.

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles

Photo Credit: Getty Images

Profiles in courage? McCain, Obama may skip bailout vote

Here's a quick one this morning: The website Politico reports that  Sen. John McCain and Sen. Barack Obama may skip the vote on the Paulson bailout plan -- if and when the plan comes to a vote in the Senate. From Politico:

Sen. John McCain has no plans to return to Washington this week, even though on Monday he expressed discomfort with Treasury Secretary Henry Paulson 's trillion-dollar bailout plan and has offered his own rescue proposal.

... Senior Obama strategist Robert Gibbs said the campaign would be monitoring the process as it unfolds this week, but as of Monday, the campaign would not commit to Obama making the trip back to Washington – even though the bailout proposal has taken a central role in Obama’s stump speeches.

The bloviation part: I hope no one will argue with a straight face these guys are too busy to go to Washington to vote. They both have access to jet airplanes. They make their own schedules.

This is a chance to show leadership. To date neither of these guys has shown much leadership on the subject -- neither bothered to even mention the credit crisis in their convention speech. Were they unaware of it? Forgot about it? Are they afraid to take a stand? Do these guys want to lead, follow, or do they want to get out of the way?

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles.

Photo Credit: L.A. Times

Obama: Talk of massive mortage bailout is "premature"

In an interview with Bloomberg Television, U.S. Sen. Barack Obama said it would be "premature" to consider a massive, savings-and-loan-type bailout of banks and lenders. He also said investors in failing financial companies should not expect bailouts by taxpayers.

Talk of a broader housing bailout is swirling today, led by the Democrats' top policy-maker on the topic, U.S. Rep. Barney Frank. From the Wall Street Journal: "House Financial Services Chairman Barney Frank said a new government company may need to be established to deal with the fallout from a crisis in the financial sector." Pimco's Bill Gross hinted at the same thing Monday when he said the credit crunch was worsening and "we need a buyer of assets."

Here's the Bloomberg story on the Obama interview; a full transcript of the interview is at the bottom of this post. Highlights, with analysis:

BLOOMBERG TELEVISION'S PETER COOK: Congressman Barney Frank says the next question for Congress and the next administration is whether the government perhaps should start buying up mortgages and distressed debt.  The government might have to take a more central role in dealing with this housing situation.  Is that something you would be willing to consider and support -– something along the lines of what happened with the savings and loans and the Resolution Trust Corp.?

SEN. OBAMA:  Well, I think it’s a little premature for us to move forward on that, and frankly something like that probably could not get through Congress until we have a new Congress and new president.  What is true is that we’re going to have to strengthen the housing market.  We’ve got to find bottom and, you know, we’ve got to explore ways so that people who can make their mortgage payments are able to stay in their homes, that those who had engaged in too much risk in terms of on the lending side are going to have to take some losses, but at some point people have some confidence that they can price assets accurately.

Analysis/Bloviation: My gut tells me it is likely that the next administration, and the next Congress, will  embrace a Barney Frank-like bailout in hopes of sweeping away bad assets (you will own them) and restarting the mortgage industry. (You will hear a lot in the coming weeks about how wonderfully the Resolution Trust Corp. has worked out for taxpayers.) Obama's answer to the question is, as lawyers like to say, non-responsive -- he didn't answer the question, he didn't tell us whether he would consider or support this idea. This is the nature of our democracy right now: Difficult questions are rarely answered.

Earlier in the interview, on the Bush administration's decision not to save Lehman Brothers:

COOK:  Given the sell-off on Wall Street, given the intervention by the federal government just a few months ago at Bear Stearns, do you think it would have been reasonable for the government to do more to help Lehman Brothers avoid the fate that it’s now -– it’s in bankruptcy now? 

OBAMA:  Well, you know, I don’t want to play Monday morning quarterback because I think that there are a lot of factors involved here.  The market had a long time to absorb the problems at Lehman’s in a way that it didn’t have in Bear Stearns, and the idea that taxpayers can continue to be on the hook for firm after firm after firm I think is a real problem.  Whether it’s Fannie Mae and Freddie Mac or some of the investment banks, at some level what you had is a situation in which investors and management at these firms were taking extraordinary risks with enormous upside when the market was good, but you can’t have a situation where you expect the taxpayer to foot the bill when times are bad.  And I think that Secretary Paulson understood that at some point the market is going to have to solve some of these problems.

Read the transcript of the Bloomberg interview below.

Update: McCain, Obama and the politics of bailouts

Updated post: The government's decision not to bail out Lehman Brothers, and to let the firm die a public death, is a legitimate campaign issue today: Should the federal government be saving Wall Street firms, or should it let them fend for themselves?

Today the McCain campaign made a clear statement: It agrees with the Bush administration's decision to let Lehman die. Unless I missed it, the Obama campaign was less clear; in his statement on the Lehman failure, and in speeches today, Sen. Barack Obama did not directly address the Bush administration's decision not to throw a financial lifeline to Lehman.

Sen. John McCain's statement (read the entire thing here) includes this on the bailout: "I am glad to see that the Federal Reserve and the Treasury Department have said no to using taxpayer money to bail out Lehman Brothers, a position I have spoken about throughout this campaign."

It's clear the McCain campaign wants to talk about bailouts. This was McCain's running mate, Sarah Palin, today: "I’m glad to see in this case the Federal Reserve and the Treasury have said no to using taxpayer money to bail out another one, this time Lehman Brothers." The line drew applause.

Obama's statement (read the entire thing here), heavy on criticism of the Bush administration's past policies, does not address the question of what the administration should be doing now, and whether the administration should have used taxpayer money to save Lehman over the weekend.

Update: In an interview Monday evening with Bloomberg Television, Obama said the idea of government bailouts for financial firms "is a real problem." He added, "You can't have a situation where you expect the taxpayers to foot the bill when times are bad. And I think that Secretary Paulson understood that at some point the market is going to have to solve some of these problems."

Analysis/Bloviation: We are in the middle of a historic housing downturn and a rolling financial crisis that has already seen unprecedented levels of government intervention in the private sector. It's quite possible the government will intervene further, perhaps with a sweeping solution to recapitalize struggling banks and take bad assets off their books. Sadly, we know very little about the thoughts of the two presidential nominees on how this rolling crisis should be handled, what they will do about it when they take office and what level of government intervention they believe is appropriate.

In anticipation of your comments, I fully understand that both candidates have talked about the need for new regulations and "reforms" of both Wall Street and the mortgage market. Good enough. That's about preventing the next crisis. What about the one we're in right now?

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles

Photo: Barack Obama. Credit: AFP

Did Palin really make a Fannie-Freddie "gaffe"?

"Palin Makes Her First Gaffe," the left-leaning Huffington Post reports tonight, arguing that Alaska Gov. Sarah Palin has made her first big mistake of the campaign, in a comment about the Fannie Mae and Freddie Mac bailout.

Here's the comment at issue: Over the weekend Palin said Fannie and Freddie had "gotten too big and too expensive to the taxpayers."

Gotcha, says HuffPost -- the bailout has yet to cost taxpayers anything! It's not expensive -- at least not yet! Palin's wrong! Blogger Sam Stein writes:

Economists and analysts pounced on the misstatement, which came before the government had spent funds bailing the two entities out, saying it demonstrated a lack of understanding about one of the key economic issues likely to face the next administration.

"You would like to think that someone who is going to be vice president and conceivable president would know what Fannie and Freddie do," said Dean Baker, co-director of the Center for Economic and Policy Research.

My take: The Palin comment is well within the margin of error on the campaign trail. There is no "gaffe" here. Congress earlier this summer -- in the housing bill that both John McCain and Barack Obama supported but didn't bother to vote on -- gave Treasury Secretary Henry M. Paulson Jr. a blank check* to invest in Fannie or Freddie. It OKd a big bailout. Perhaps in your book a blank check freshly signed by Congress is not "too expensive." Perhaps you trust the government not to spend a blank check. Perhaps pigs have wings. Palin was right: The very existence of a blank check means that Fannie and Freddie are too expensive to taxpayers.

*In a comforting bedtime story that several members of Congress actually believed, Paulson said the blank check was so big and powerful (a bazooka of cash!) he would never have to use it. By the time Palin spoke, it was clear that Paulson's attempt at "verbal intervention" had failed and that real taxpayer money will be spent to prop up Fannie and Freddie.  No one knows how much, but the Treasury has signed contracts to invest up to $100 billion in each company. Oh, and loan them money too. Oh, and buy their mortgage-backed securities. Do you really want to argue that she made a mistake by saying the two companies are "too big and too expensive to the taxpayers"?

Give her time, and a few one-on-one interviews. I'm certain she's as capable of the other three of a real screwup. This is not it.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles

Photo Credit: Associated Press

Fear factor: Obama, McCain and the credit crunch

They gave nice speeches, inspired their conventions and hit the road. What they didn't do -- neither John McCain nor Barack Obama -- was dare to say how they will solve the most serious economic problem facing the country: the deepening credit crunch. They didn't even dare to mention it.

It is bad out there and getting worse: banks are in trouble and are unable to raise capital. The current Federal Reserve, and the Bush administration, have already taken unprecedented steps to back up and prop up the nation's financial system. And yet the crunch deepens. Fannie and Freddie can't raise money -- the Bush administration is reportedly working on yet another weekend rescue plan.  Detroit wants a $50 billion bailout. What would they do, Obama and McCain?

No mention in Obama's speech. No mention in McCain's. Why not? Mortgage broker/pundit Lou Barnes takes a stab:

Neither candidate has a word to say, which is understandable, as many money pros still don’t get the nature and magnitude of the problem. At nomination, which candidate would like to explain to the people these choices ahead: If we guarantee Fannie and Freddie, what parts -- stock, bonds, preferred, subordinated? Then, which banks do we save, and their parts? If we save rich financial guys, what of Ford, Chrysler, and GM, and their retirees? What of the impulse to save homeowners, no matter how foolish, no matter how terribly unfair to the prudent but unlucky?

Not one of the four nominees has financial-market experience or evident knowledge. Better not to talk. However, election-cycle paralysis may be overtaken by events.

Good questions. Which banks would you save? Which troubled companies? How? This is likely to be the first crisis faced by the next president. Is it too much to expect their thoughts on it?

--Peter Viles

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Photo Credit: Los Angeles Times