We the Cared For

A Massive Government Bailout by any Other Name

Are you convinced about the bailout yet?

Are you feeling the pressure? Have you noticed the shift in the conversation by Wall Street, the media and the supporters of this bailout?

It is now all about “Main Street”

• The government bailout is now called the “Rescue Package”

• The stock market will collapse and the equity lost will be lost by everyone including Main Street

• The problems are spreading to small business which is going to cripple the country

This is spin marketing in its most unethical form. They couldn’t sell this pig to the American people, so now it’s being repositioned to tell you if you don’t buy the pig, you won’t be able to buy the bacon and ham at the grocery store either.

The “Rescue Package”

Still an unprecedented, massive government bailout and expansion of government that is attempting to socialize the losses of the private markets. It will be the first installment of many more to come. Even the spinners admit that this won’t fix the problem.

The Stock Market Collapse and Main Street

The markets didn’t collapse when Paulson and Bernanke tried to scare us into acting two weeks ago. Nor did it collapse when we all woke up Tuesday after the initial rush to a bad solution was appropriately leveled in Congress. The stock market is going to decline whether this bailout happens or not. It is is over inflated due to too much credit in the system for years and has to readjust to reflect reality.

The Problems are Spreading to Small Business

This is the most dishonest and deleterious message in the new spin. I heard the same story about the guy that couldn't meet his payroll because of these problems, from five different politicians and commentators on three different news shows. The latest (second story plucked from millions of small businesses) is the lady that can’t get access to a $1 million to expand her business.

First of all, if I spent some time at it, I could go find you stories of small businesses that are getting credit and loans right this very minute.

Second, this “guy” must be running his business on a shoe string if he needs to borrow money to make payroll and will probably be out of business soon regardless of the bailout.

Third these people may not get access to the loans they need anyway. Credit has tightened and rightfully so. Banks don’t want to make loans they don’t think will be paid back anymore (novel concept).

Don’t listen to the fear mongers who want your money to pay for the problems. Demand a private market solution that may have to contain a temporary, tax payer bridge loan, to get the best solution in place.

Let’s work this problem hard, for whatever time it takes, with the right people. The market can certainly hold its collective breath until it's done. 

Stay the Course on Denying the Bailout

Hats off to our Congress today for not letting our fears overcome our sensibilities. I want to refer back to the blog article from June 25, 2008 “Fear and Freedom” because if we’re not careful, we’ll let it happen again:

What will fear make you do?

If I can induce fear in you, I can get you to react;
If I can get you to react more, you will think less;
If I can get you to think less, then I can gain control of you;
If I can get more control of you, you become weaker;
If you become weaker, you look to me for protection;
If you look to me for protection, you will do what I tell you;
If you do what I tell you out of fear, you have lost your courage;
If you have lost your courage, you will lose your freedom.

Some in Congress and on Wall Street are continuing to try and scare the American people into a continuation of the largest government bailout in history. A full year of the “sky is falling” has already resulted in the government’s direct participation in propping up, buying and lending billions of dollars to private companies. Fannie Mae and Freddie Mac have been fully nationalized; FHA is lending billions in subprime mortgages as I write this.

The folks on TV are joining in the frenzy and the market makers on Wall Street are putting in their two cents with all of the major indexes.

A moment on these folks.

The people involved in Wall Street including the big TV names that make their living in the markets, or are friends of Wall Street, are no different than the investment bank traders who had to keep the mortgage frenzy going to keep dollars flowing in their pockets. They are no different than you and I, a slow-down, a down turn and their goes the groceries, and in their case, the big bonuses.  Why wouldn’t they do everything they can to keep the money flowing even if takes trillions of dollars of taxpayer money to do it. To be honest many of the folks talking on TV just don’t have the knowledge or experience to know what they’re talking about and some of them are doing more harm than good with their less than expert opinions.

Don’t let them scare you.

The market hasn’t failed yet.

Better yet, let me give you the honest truth. We are in for a significant amount of pain whether we bloat the government and hand this money over for mismanagement, or not.

People are concerned that everyone will point to the economy three months from now if this doesn’t pass and say “I told you so, you should have listened”. Well guess what… it’s going to happen whether they do this or not, so fasten your seat belts.

This problem was 10 years in the making and it will not go away tomorrow no matter how many trillions of dollars we throw at it. The system has to undergo a complete deleveraging and recapitalization. Whether the taxpayer buys the bad assets, or the capital markets take the hit, it’s coming out.

This bailout is not the solution. As you can probably tell, the trillion or so of our money already spent wasn’t the solution either.

We need to get this right, and right means private markets take care of the private market problem. It’s time to slow down. This problem needs to be worked and worked hard with the right people for however long it takes.

We should demand an “economic crisis team” that consists of the best minds from industry and the universities and task them with a mission to develop a private market solution. If it takes 90 days so be it. Let the failures that would have been pushed into an uncertain future happen along the way. If the team decides a bridge loan is required the Fed can continue to pump out the support and bridge loans until we get there.  China and everyone else can wait and if they don’t think we’re a good credit risk in the future, we’ll have to adjust.

I just read the draft bill which can be found here and it creates no fewer than five new governmental departments/positions/committees. It hands unprecedented and unwarranted powers to the Treasury and should not be allowed.

Credit is tighter and it’s going to get even more restrictive moving forward regardless of which way we turn.

We have experienced an extended period of excess credit availability. It has made it easier for people and companies alike to borrow money. As a result it has inflated everything. Too many houses, too many cars, too many businesses, too many jobs.

It has inflated the values of all assets.

If it’s easy to borrow money for cars; we produce a lot of them, their prices rise, jobs are created, and companies make more money.

The current, and soon even more restrictive credit (whether we hand the rest of the keys over to the government or not) is going to have the inverse effect; Fewer qualified borrowers, fewer cars sold, prices decline to meet demand, jobs are reduced and companies will make less money or go out of business.

We will recover and if we get it right, we will grow at a realistic pace that has a strong foundation.

It is a stark reality that we have to live with and either party will be able to say “I told you so”.

Government's Social Engineering; a Key to the Credit Crisis

I have a family friend who penned an excellent email, the gist of which was his anger over the Mark Levin Radio Show and others trying to blame the Bush administration for this financial disaster. He is absolutely spot-on.

Since he didn’t have access to much of the history, I will lay out the important events I think led us to this point. This is explained in much greater detail in my upcoming book "From Your Wallet to Their Pockets: Privatizing Profits and Socializing Losses".

It is government intervention in private markets that got us here. Now, some say, "it's the government's responsibility to get us out". That’s just a much larger perpetuation of the problem, an adrenaline like boost for the cancer that’s sapping the life out of the victim. The “fix” should fall squarely upon the private markets.

The History of Government Intervention

1977 - The Community Reinvestment Act of 1977 (CRA), President Jimmy Carter – Up until this time, banks would only lend to qualified borrowers. Many “unqualified borrowers” were obviously in lower income neighborhoods, and in lower paying jobs, with poor or no credit history.

Since this was not serving the social engineering goals of government and congress at the time, this act was passed to force banks to lend to these previously unqualified borrowers. It created a bank CRA rating and the bank risked losing its cherished bank charter if it did not achieve the government’s goals and qualify for a good CRA rating. The more loans and investments to unqualified borrowers, the better the rating. 

Since Usury Laws, laws that capped the interest rates lenders could charge for their loans, were in place at the time, these loans were made to risky borrowers for the same price they were made to highly qualified borrowers. Government forcing private markets into bad loans, bad decisions and unprofitable loans.

1980 - The Depository Institutions Deregulatory and Monetary Control Act of 1980, President Jimmy Carter - This act eliminated the caps on interest rates lenders could charge for loans. Eliminating these caps allowed lenders to charge rates that allowed them to meet their profit requirements. This change had the positive effect of making credit accessible by people who could not qualify for loans previously. It was also the engine that begins to drive subprime lending.

The combination of CRA and this act begin to force, then open the spigot for subprime lending in an attempt to meet the governments goals of creating a private market to replace public housing.

1982 - Garn - St. Germain Depository Institutions Act of 1982, President Reagan – Deregulates the Savings and Loan Industry. Title VIII of the act allows for Adjustable Rate Mortgages. At the time bankers, appropriately, owned the credit and interest rate risk on the loans they made. This act allowed the banks to transfer interest rate risks (the rise, fall and management of interest rate moves) to the borrower. These are a significant portion of the delinquent mortgages today.

 

1986 - The Tax Reform Act of 1986, President Reagan - Eliminates the interest deduction on all loans (credit cards, automobile loans) other than mortgage loans. This change, in turn, made mortgages more attractive to borrowers. Instead of taking out mortgages to purchase the home they occupied, borrowers rushed to take out first or second mortgage loans for major purchases such as automobiles, vacations, home improvement, and investments.

 

In my personal opinion, this piece of legislation was a major contributor to the popularity of home equity extraction (commonly referred to using one’s home as an automated teller machine). It practically dared borrowers to move past their previous discomfort about high loan-to-values (which the reader should interpret as lower equity positions) in their homes.

 

1999 - Gramm-Leach-Bliley Financial Services Modernization Act of 1999, President Clinton – Allows commercial banks (B of A, Citi, Wells Fargo etc.) and investment banks (Smith Barney, Shearson etc.) to consolidate.  Accelerates higher leveraged lending activities and increases risk taking in the banking system.

Adding to the Pile

These pieces of legislation, combined with government’s creation of Ginnie Mae, Fannie Mae, Freddie Mac and FHA, are the root of this problem. The Federal Reserve Bank has whipsawed the markets. This government’s social engineering ala China under the blanket of “free market capitalism” is a primary driver of our problems today. Securitizations and greed are the other, enabled by these pieces of legislation.

So where is President Bush to blame in all of this? He’s not. He certainly will be if this bailout goes through; it is a travesty and should not be allowed.

On a final note, our congress sits high in their chairs berating Paulson and Bernanke asking why they didn’t see it coming, and it's still happening under their watch.

FHA

Well folks it’s still happening today in a little talked about area of government owned mortgage lending which is FHA. With the demise of other subprime lenders in the market, this entity is currently (right this minute) approving and insuring massive amounts of subprime loans that are secured through another government owned entity, Ginnie Mae.

Right under every ones righteous noses in congress, the government (we the people), continue to accelerate our ownership of the subprime business.

The Politics in the Economics

I am posting a response I made to a newsletter reader who had some great questions...

Morning   

Unfortunately I start with a major predisposition here regardless of some of the Kudlowish “greatest story never told” commentary out there. The government has no business or authority to make loans, purchase assets or engage in private business… period. It is not constitutionally authorized and it certainly  is not within the Feds charter and for good reason. The very cynical concerns of some over the role and dangers of a “central bank” are put to rest here. Since we have leapfrogged legal authority with “New Deal” voraciousness it’s already done but that is the context.

 

Adding to the context is the accounting rules. Agreed that mark-to-market is a big part of the problem here. But there is a very real reason there is no “market” so we’re looking at changing the rules to meet the need. The market isn’t crazy, there are a majority of good assets out there and there is a significant pool of bad assets out there. The question is how good is the good and how bad is the bad? The market says it doesn’t know. In fact if you take the ladder up in write-downs for the past 18 months by those that were supposed to know when the marks were known, the underestimation of the problem can’t be ignored. To artificially write these assets up to held to maturity values assumes that someone has the risk based capital set aside to apply to them and system wide we don’t. Yes the market has thrown the baby out with the bath water but we need the baby back, not the dirty water.

 

This is the fundamental problem.  Some $19 trillion in mortgage loans were made between 2001-2007. Most of it moved off balance sheet. Regardless of the tail you pin on the “how much is bad” donkey, the risk reserves that should have been on the systems balance sheet don’t exist. A very significant portion of what should have been set aside was paid in transaction fees to the parties along the way. The over collateralizations and insurance wraps have proven entirely inadequate in the face of too many bad loans. Yes I know it perpetuates itself, ratings downgrades, increased borrowing, lowered equity values leading to this death spiral.

 

The AIG “loan” was done for a reason. The company was about to fail. It got into its problems as did the others. It has good assets and bad assets. The private markets said too risky. For the government to act as if we’re going to make a profit is the same double speak engaged in when the fed waved it’s magic wand and opened up the auction facilities and began accepting poor quality assets as collateral.

 

I don’t prescribe to the household net worth numbers as an indicator of broad based economic conditions. The devils in the details; inflation, stagnant income, value of stock portfolios, inflated housing values (ala the current situation) vs. debt, the percentage of the population enjoying the increase etc.  It just decreased some $533 billion.

 

The only reason we’re not close, yet, on the bank failures is because of massive, unprecedented, government intervention in the system. These interventions are not only going to cost the American taxpayer a fortune now and in the future, but we’re perpetuating the problem today. FHA has become the “insurer” of last resort and the crap they’re putting on the books and securitizing through Ginnie Mae as we speak, will be just another wave. By the way the early 2008 mortgage vintages are apparently showing worse than the 2006, 2007.

 

I’m not a doom and gloom person, these are just facts as I see them. This massive restructuring of the balance sheet is going to be a significant drain on the economy. If we do it successfully and appropriate risk reserves are required moving forward, that in itself is going to slow credit availability from these boom levels and everything, wages, growth, home values etc. will be going with it. Already too long and probably terribly boring so don’t want to get into the print money, inflation, Treasury interest rate conversation.

Who’s Stimulating Who?

A Second Economic Stimulus Package?

It seems that Obama and now Pelosi are beginning to talk about and drum up support for a second economic stimulus package.  The first $152 billion fell flat, so let’s try another $50 billion or so.

From the data on the results of the first economic stimulus package, it appears that what we accomplished was sending more of our money to our enemies during the period in the form of higher gas prices. A failed energy and tax policy working hand in hand under the obfuscating cover of helping out the American people.

Does anyone else find this fascinating?

These “stimulus” packages are nothing more than sending the money earned by hard working Americans back to them. 

The difference is of course that since they confiscated the money from you first, they get to determine who gets their money back in an extremely corrupt, mixed, modern day version of the Vampire Lestat and Robin Hood.

As an example, they also send a big portion of “stimulus” back to our bastions of frugal money management also known as our state government’s coffers. Money laundering takes on an entirely new meaning when it is done under the auspices of Congressional “law”.

If putting this money back in taxpayer hands is necessary for the good of our economy, as now admitted by our representatives, why don’t we just hold them to the admission and reduce taxes permanently across the board and let us “stimulate” ourselves?

Alas, I fear not. Obama and Biden are telling us they will force Americans to do their “patriotic duty” by taking from one set of taxpayers and handing it out to another set of taxpayers.

Oops. It’s ok to “take from the rich” through tax policy because they’ve convinced the American people over all of these years that the constitution doesn’t matter. But letting the cat out of the bag that you think “patriotism” is stealing one persons money to give to someone else takes the mask off the socialistic face.

This thin mask has been carefully constructed since the “New Deal” and our socialist congressional and judicial “leaders” guard and wear it carefully.

It’s easy to do when the American people let it happen because they aren’t as successful monetarily and think that somehow the rich deserve to be penalized for their success. That they are somehow deserving of the result of someone else’s work. If we can keep the definition of wealthy defined as 5% of the population somehow the other 95% think its ok to hold them up by legal gun point.

 How cool is that? The votes outweigh the personal rights. The 5% could vote against it but who cares? If even half of the 95% vote to reach their hands in the 5% pocket, the crime has been blessed.

I’m sure some of you may recall that this was what the Bill of Rights and the Constitution were created to control; the tyranny of the majority over rights of a few and the individual.

We should just open these people’s houses and let's all go in for a weekend and take the food, cars and other property we want. At least it would be an open, honest expression of the thievery.

 “Representatives” like Biden and Obama clearly understand their power to create segments of the population and treat them differently. To play them against one another, to take trillions of dollars from working people, then decide who gets it.

Americans had better wake up and smell the coffee. Oh and if you don’t have enough or like the way your coffee taste, head on over to someone’s house who makes more than you do and take theirs.

You deserve it.  

 

 

We the Bankrupt

The Congressional Budget Office (CBO) has just released a report showing that the federal budget deficit will grow by an additional $246 billion this year to $407 BILLION.

To put that in perspective this means that in addition to the $2.5 TRILLION in Federal tax revenues in 2007, we have loans we must pay back to the tune of $407 BILLION.

This does not include any additions to spending for the new Feddie Mae and Feddie Mac take over. Nor do I think it adequately considers the additional expense to our borrowing costs that will result from the deterioration in our countries credit rating (real as “rated” or just as real as “perceived” by the market) as we publicly pay for the sins of private industry.

We continue to ask and let the Federal government expand to take care of us and we have spent our way into a real conundrum here.

Take a look at this chart produced by the Heritage Foundation showing inflation adjusted federal taxation and spending…

 

I would encourage you to take a look at the full series here http://www.heritage.org/research/features/budgetchartbook/index.html

Here are a few highlights all of which are inflation adjusted comparisons (apples to apples):

• Federal spending per household has more than doubled since 1960.

• Federal spending grew nine times faster than median incomes since 1965.

• Federal spending is growing faster than federal revenue.

• Federal (federal only) taxes per household have increased from $10,800 in 1965 to $22,100 in 2007.

• Despite the cost of the war, Defense spending is below its historical average as a percent of GDP.

We’re like the spoiled children of very rich parents. As long as they keep paying for my car, my college education, helping me buy and keep my house, let me move in when I can’t get a job or give me money in the mean time, cover my car insurance and gas and so on... I have very little incentive to work and sustain myself.

And so "We the Cared For" spend money we don’t have.

We’re picking every ones pockets to keep up a life style we can’t afford.

Even worse, we dump social “policy” issues into federal mandates that are so far outside constitutional authority, your tax dollars are being used to promote laws, regulations and programs you don’t even agree with.

Well … "We" are the collective "Parents".

We may have been rich, but now we’re heading for the poor farm. We’re mortgaging and borrowing so much money to keep the kids happy that when they take over the estate they will have nothing but bills to pay.

In your personal life when there is no money coming in, and you’ve borrowed all you can personally, lenders won’t give you any more money.

The only difference in this personal and government comparison is that unlike the family who has reached its borrowing limit, the government can just keep on getting more loans.

Have you ever noticed when people get serious about controlling their expenditures? I mean really serious? Is it when the money keeps coming in? Of course not; it’s when the money stops and they have no choice.

We have to remove the choice from government just as the constitution is designed to do. That is the only solution to this problem. We have to cut spending to what is constitutionally authorized, cut tax revenues to meet the new  (lower) spending, and severely limit (stop) borrowing.

It can be done.

One only has to look back as far as welfare reform which was pilloried by the opposition (Mommy Government folks). It was a massive expenditure and since the parents were covering the bills, it also took out the children’s incentive for work.

It has also been a rousing success by almost any measure and even Obama admitted that while he was opposed to it then, he is now convinced by the outcome.

Our government is bloated with these same departments, programs and spending that do NOT belong there.

Rather than pushing out some little sound bite, let’s keep it simple and ask congress to actually go to work for us.

The definition of work here is not just showing up to scrounge up more money, borrow more money and then redistributing that money.

This work, real work, would consist of the following:

1. Create a “Constitutional Assessment Tool” (CAT) under which all aspects of government can be assessed. Note that I did not say against the case law, or the legislative and judicial authorities that have led to this bloated mess… but the actual Constitution.

2. Examine every single department and program and test it against CAT and identify every single department and program that is not authorized.

3. Formulate a plan to eliminate those that are not authorized.

4. Recast the federal budget and determine the required revenues (which will of course be significantly reduced).

5. Implement a fair tax plan to generate those revenues.

6. Require a balanced budget and eliminate current and future deficits.

7. Decouple the national banking system from private enterprise.

8. Implement this analysis for everything from this point forward.

With all of the entrenched interest, this would be very difficult and challenging work.

It is also the hard work and the approach we should expect from our representatives.

Instead of this distorted system where the goal is to get as much as they can for their individual constituencies, how about a goal of working for the “American” constituency so that we as a people may remain free.

After this is done, they can go back to grabbing at the collective wallet for their individual constituent interest…  within the legally defined limits of the constitution.

Feddie Mae and Feddie Mac

At the risk of adding one more voice to the fray, it is impossible not to comment on the nationalization of Fannie Mae and Freddie Mac which, by default is the socialization of the home mortgage business.

We have now stepped firmly into a socialized housing policy… taxpayers are directly responsible for the engine that drives the housing industry.

This was not unexpected. For a history and detailed explanation and the forecasting of this very result, see my blog articles from back in July; The Credit Crisis and the Rush to Government Bailout and Fannie Mae and Freddie Mac; the Federalization of the Mortgage Business

The second of these two entities, Freddie Mac, was created to address the issue of “competition” when Fannie Mae was spun from the government’s balance sheet to make the Federal budget look better at the time. Fannie Mae would have become the dominant power in the mortgage market overnight; so Freddie Mac was created to compete with them.  

It’s now time to combine the two under our new nationalized mortgage industry.

Answering Two Questions

There is a great deal of analysis circling around two primary questions about the impacts of this government take-over:

• What affect will it have on mortgage interest rates?

• Does it signal the “bottom” for falling house prices?

The Effect on Mortgage Interest Rates

If mortgage rates go down as a result of this action it will be temporary, and a short-lived bounce of exuberance. (If you can imagine being exuberant that the tax payers have just taken on Trillons in new liabilities).

The reason interest rates won’t decline significantly, is that these two entities have been borrowing and funding their business as if they were already backed by the government. That has been the investors view since they were formed. There is no change from that respect.

The only change today is that the “implicit” guarantee is now made “explicit”.

The only reason mortgage interest rates or the guarantee fees from these entities would be reduced is if taxpayers not only capitalize these entities for the immediate need, but SUBSIDIZE these entities further to absorb more risk than they currently have. This is most certainly a possibility, however if Government sticks to its purported plan, the idea is to be sure they survive by assuming the current risk, not creating and subsidizing new and greater risk. Yeah right.

Since these entities now come under the direct control of our politicians and the administration you can bet this tool will be manipulated to produce desired political outcomes at even greater costs to the taxpayer.

All things being equal, this particular action should be a zero sum game for interest rates.

Will this change mean we’ve hit the Bottom for Housing Prices?

In short… no way.  

Housing is going to continue to be pummeled through 2009. At the risk of sounding bleak (just the facts as I see them) housing is going to continue to languish and even continue its downward spiral due to the following:

• Mortgage and mortgage servicing companies continue to see rising delinquencies. Rising delinquencies create more foreclosures; more foreclosures create more REO (Real Estate Owned “by the Bank”). These companies are not in the business of making money on properties, want them sold as soon as possible and will keep selling them at below market (read downward pricing) prices.

• Fewer and fewer borrowers can qualify for a mortgage loan. The fewer qualified buyers there are, the lower home prices have to go to help them meet the new definition of a “qualified buyer”.

• Servicer’s efforts to stem delinquency and foreclosure through loan modifications and short selling have only extended the problems into an unknown future.

• The credit and housing crisis is crushing the broader economy. We are in a recession, credit standards have tightened considerably, job losses will continue to increase, and other asset classes (auto, credit card) will, and have, begun a rapid credit deterioration, adding to the pain.

The only way that the nationalization of these two entities would have an impact on housing prices would be if they loosen credit standards so more people could qualify for a mortgage loan. The only way they could loosen standards would be through additional taxpayer subsidies to accept higher credit risk… a very distinct possibility.

The bottom line is that unless we’re taxed even more to pay for looser credit standards and lower house prices, the only meaning this has is that our private system for mortgage financing has failed and we own it.

It is going to cost an absolute fortune to fix these entities problems and the unintended consequences of these actions are still completely hidden from view.

Instead of congress working to untangle this ball of yarn of connections between the private capital markets and the national banking system, we have just done the complete opposite.

We have just mortgaged our children and our grandchildren’s future.

This is not an “academic conversation” about moving away from free market capitalism and the constitutional differentiation between the purpose of limited government and what is supposed to be left to private interest.

This is another long and dangerous leap towards socialism. This is not some radical view, it is a fact.

Wayne LaPierre, the CEO of the NRA couldn’t have said it better recently in an interview with Newsmax…

“What motivates me is the concern that the America that is being designed right now won’t resemble the America we’ve been defending”.    

A “do nothing Congress” at this point would be a blessing because every time they “do something” our principles, our Constitution and everything we purport to hold dear as a nation, is surrendered.

Putting Your Freedoms on a Strict Government Diet

In a  conspicuous example of the never ending storm of special interest groups, lawyers and misguided politicians thundering  ahead to steal your freedom and liberties, Controlifornias (CA) esteemed Governor Schwarzeneger - Shriver signed into law AB 97 a ban on the latest scourge in our nation… “trans fats”.

What this means is that in 2010, no Controlifornia restaurant will be able to serve foods containing trans fats.

It does not mean that business owners can choose that their foods contain these little devils of destruction and that customers would be able to choose to eat them or not. It means that our paternalistic state has made it illegal (making the choice for us for the good of our health).

"California is a leader in promoting health and nutrition, and I am pleased to continue that tradition by being the first state in the nation to phase out trans fats," Governor Schwarzenegger said today. "Consuming trans fat is linked to coronary heart disease, and today we are taking a strong step toward creating a healthier future for California."

These “I know how you should live and you’re going to live your life my way by God” people have taken a matter of private choice and turned it into public policy… again! Like the ratchets on handcuffs, they are squeezing another notch closed around your freedom of choice and we’re going along with it like confessed felons.

Lo and behold also just in... this past Tuesday, July 29, 2008 the Los Angeles City Council passed a law barring fast food restaurants from opening in South Los Angeles.

Another Deadly "War" Instigated to Kill Your Freedoms … The War on Obesity!

This is not a “slippery slope”. This is a cliff we have fallen from and unless the American people wake up in time to pull the rip cord on the parachute, the thump you won’t hear at the bottom will be government laws and mandates about more of your diet, your exercise, what and how you can cook in your home and every other personal choice you make in these very personal matters.

We have talked about bad science, misrepresented statistics and media perversions before. How does this happen?

Here’s the simple fact of it… these people want you to live the way they think you should live regardless of your constitutional rights. You then combine these groups with the segment of law “professionals” that are out to make millions by exploiting our legal systems acquiescence to extract settlements through blackmail in the millions and billions of dollars. Add to this stew, politicians looking for headlines and to pursue their own personal agendas regardless of the oft unheard, more often unknowing people they represent, and the recipe is complete.   

Systematically Breaking Down Your Constitutional Rights

Step 1
Think of it strategically from the hunting lawyer’s perspective…  Broad rights limit revenue, narrowing your rights generates revenue.

If you have a broad right, it is difficult to entrap, ensnare or take legal action against you. If I (the lawyer) can narrow your rights, I not only have the opportunity to win huge settlements by initially cracking the door open, I now also have massive fresh streams of revenue as the trip wires of new rules, regulations, and further narrowing flood through the now cavernous breach in the wall.

Step 2
The “Mommy Groups” (“mommies” is not about the gender but the traditional role that has to protect and coddle everything we touch so that no one and no-thing, can possibly get hurt) position their issues as the high moral ground that the general public finds politically incorrect to argue with because they have forgotten their constitutional right to personal choice. It even tugs at the public’s sense of righteousness i.e., no one likes smokers and it’s dirty and killing everyone, drinking is bad for your health and a moral turpitude, fat people are ugly and unhealthy, risk takers endanger everyone, everyone should have equal access to everything regardless of the cost or the benefit, we need to protect the environment and our children will all die if we don’t do it the way they want, guns kill people, cell phones kill drivers.

Lawyers see the dollar opportunity, the mommies raise their righteous flags and the two come together in a twisted marriage. 

Step 3
The next step for these abusive parents is to gather facts to sensationalize and support their cause. They commission studies through academia, enlist the power of government agencies whose budgets and missions are positively influenced by the “cause” and obfuscate the inverse information that doesn’t support their position.

This information always includes how many people are dead or dying from the problem and the unfair burden it places on the rest of society through increased cost to everyone else!

Step 4
Mommy based government officials and governmental departments seeing an opportunity to maintain or expand their budgets, increase their fame and influence and/or further their own personal agenda join the family to further their interests.

Step 5
Having assembled the family and formulated the battle plan, the job is to then get the perverted message to the masses with the ever obliging, “don’t let the facts confuse the message” hyper liberal media. With very few current exceptions, these mommy enablers (editorial mommies themselves) require nothing more than a few juicy bylines to warrant the complete agreement and continued skewing of the message. Opposing facts and issues would not only require work on their part but be in opposition to their own editorial “beliefs”.

Step 6
Law suits are filed against companies and individuals and they are blackmailed into millions of dollars in settlements or incur unsustainable legal costs to defend their position.

Step 7
Having cracked open the door, they pursue two activities in tandem; spread the lawsuits and regulation as far and wide as possible and pursue further narrowing of the right.

Private Mommy Interests

One also cannot underestimate the benefits and thus influence applied by benefiting private interests. Let's take one magnificent example of a continual mommy supporter… the insurance industry.

Ever in pursuit of collecting as much in insurance premiums as possible while paying out as little in claims as possible, these new narrowed rights bring them the ability to segment out these now deleterious populations for discriminating treatment.

No longer do heavy people, smokers, people who drove after 2 glasses of wine and received a DUI, people talking on their cell phones in their cars, people with traffic tickets, etc. have to be included in the "general population". They can now restrict their coverage to these new "groups", charge much higher premiums or deny these abhorrent people access to insurance completely.

The more “groups” we create, the fewer of the” general population” there are (now) by definition and “insurance” no longer has any connection to its meaning for the masses.  It has now morphed into a “lifestyle” credit application with ever tightening approval guidelines.

You can write in stone that this trans fat absurdity and the war on obesity will continue to erode your very personal choices. The “obesity chart” will continue to change so more people can be categorized as “overweight” or “obese” from its already ridiculous levels.   Business owners and individuals will be further restricted by the government in what food they can serve or eat and the amount, type and frequency of your exercise will come with differing taxation and costs. It is just the latest example in a very long, proven line of constitutionally crushing efforts.

Our country has its national security at risk, energy independence to pursue, a broken social security system, crushing budget short-falls and our leaders involve our government in weighty matters like vegetable oil and margarine because apparently we aren’t equipped to decide what to eat on our own.

Our need for Mommies that care for us and our inability to make these weighty choices is probably a direct result of the great job mommies have done running the educational system in this country… since we’re all apparently just too stupid to know any better.

I was Misled

I was struck this week by a word that is showing up recently in everything I see and hear. It is a term that has now reached an iconoclastic status in the American Lexicon … “Misled”.

The use of this word has recently spread its wings far beyond its usual roost in the political realm in the heat of the mortgage, housing and credit crisis. The proliferation of this word and its use is troubling in many respects.

The first is its ability to abdicate personal responsibility and accountability. The word “misled” is being used today as a verbal shield and sword; a shield to deflect blame from one’s individual decisions and actions to another individual or to another group of people and a sword to slit the bag of money they may steal from the people that “misled” them or from taxpayers whom they expect to cover their bad decisions.

A few current, shining examples are:

• Investors, including very sophisticated money managers, were "misled" about the risks and the value of their MBS investments
• Borrowers were "misled" about the dangers of adjustable rate mortgages
• CEOs "misled" the public and shareholders (pick your topic)
• Homeowners were "misled" when they received a loan for 100% of the value of their house at the time they bought it
• Home buyers were "misled" about the value of their house by appraisers
• Municipalities and the wide range of reasonably well-off investors trying to take advantage of that wealth were "misled" when they were “steered” into Auction Rate Securities
• Depositors were "misled" about the strength and capital underpinnings of IndyMac bank and others

The very dangerous result of this massive cleansing is that it washes off the dirt of the individual’s responsibility for making their own informed decisions. If the individual’s decisions had resulted in the mad money everyone expected, and many reaped, instead of being “misled” by others, they would be socializing the brilliance of their own incredible investment savvy around the backyard barbeque or enjoying their new promotion at work.

Our free markets and our constitution insure the individual’s right to strive to attain their piece of the American dream.  It does not guarantee that people will achieve this dream. It does not say if they reach out their hands and they come back with money, hoorah, but if those same hands come back burned they can put on the salve of public tax dollars or use legal thuggery to achieve the same.

Yet, we are allowing people and companies to sprint like track stars under the umbrella of being “misled” to socialize the losses wrought by their bad decisions.

We have turned the old saw that “victory has many fathers and defeat is an orphan” into the uniquely new American version that “victory has one father and defeat rests on the backs of others”.

The very freedom to contract for investment, to buy a house, a car or anything else comes with an individual duty for gathering facts and information being accountable for those decisions. 

So, you might ask, “what if the information is bad or tainted?” “What if they didn’t explain it fully, correctly, or provide the proper warnings?”

In every example listed above, each of these transactions is highly regulated, requires disclaimers, disclosures, contracts and a customer’s signature that they understood the risks and rewards. Where companies took risks and subsequently failed one has to consider that these are their businesses and professions. If these professionals don’t understand the risks they are taking, and take the loss (their own job, business failure or both), they should get into a different business.

As far as receiving the “right” information … what information is ever certain when produced by another individual or group of people? When has information produced by human beings ever not been slanted by their ability to gather facts, process those facts within the context of their education, experience, cultural background and personal biases?

When money is involved, should you assume any person at either end of the transaction is looking out for your best interest? Or should you consider that there could possibly, just possibly, be some taint of their desire for their own economic gain?

Unless we are talking about math where 2 + 2 = 4, this pristine and precise information cannot be found. In fact, the use of math in the complex models used to provide much of the information today is so steeped in assumptions, that include those same individual biases that in this new math 2 + 2 can end up equaling 7, 25 or 100, depending on the individual modeler.

The financial statements of publically traded companies are probably the most historically scrutinized results of addition and subtraction and weighty regulation and audit, yet the allowance for management variance and categorization leaves even these additions of apparently simple 2 + 2 equations to varying sums.

The old “Caveat Emptor” or “buyer beware” is the mantra. The right to participate and the opportunity for gain, brings with it the risk of loss. If people don’t have the desire, ability or will to be informed enough to understand the risk of their undertaking, is it someone else’s responsibility to be sure they do?

If they subsequently leave the thinking and advice to others when their economic viability is at risk, is it someone else’s problem?

But if I hadn’t been “misled “(lied to), I would have made a different decision.

Really?

When dollars seem to be falling from heaven on your friends and neighbors in a market boom and the press is touting the incredible economic miracle, are your ears open to the cautionary tales and explanations of the risks?

Would your investigations be deep and wide to make an informed decision or would you perhaps skip over the pesky warnings for a reach at the pot of gold at the end of the rainbow? That’s your right for sure, one way or the other.

Hindsight’s 20/20, and many lawyers make their living peering through the perfection of hindsight’s 20/20 glasses. So many lawyers, so many pairs of expensive glasses, and so many Americans rushing to empower them to get back their stolen money from those that “Misled”.  Join these with so many of their fellow lawmakers and lawyers in congress who are all trying to keep their jobs as the panicked and distressed line up at the public and private trough to be remunerated or saved for being “misled”.

I have to admit, I must have misread the constitution when it seems to guarantee my fellow Americans and I the right to pursue life, liberty and happiness without the interference of government or of other people! That we would have this right as free individuals to make personal choices that would benefit me if made correctly and be my problem if they were wrong.

But for this right, this right to participate in this grand experiment in the right of the individual to make independent, free decisions, I wouldn’t have the right to shift the burden of my bad decisions to others under any umbrella… but I guess I was MISLED.

Fannie Mae and Freddie Mac; the Federalization of the Mortgage Business

The Federalization of the mortgage and housing industry is front and center in public awareness as of Thursday. I talked about this just last week in the “Credit Crisis and the Rush to Government Bailout”. This has been happening in a series of ways for the past year as the crisis began and is now reaching zenith. The Government Sponsored Enterprises, Fannie Mae and Freddie Mac are “quasi” governmental entities and their failure has always been presumed, and as you will see as time progresses, not allowed to fail as government intervenes to support them.

The GSEs

No serious discussion about the mortgage industry can leave out the most powerful players in the markets development and ongoing operations. These organizations (GSEs) securitize and/or guarantee and hold mortgage loans in the Trillions of dollars.

There are three primary mortgage related entities with direct or indirect ties to the government. They are the government owned Government National Mortgage Association (Ginnie Mae), and the Government Sponsored Enterprises which include Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Ginnie Mae is directly owned by the government and their mortgage securities are the only securities explicitly backed by the full faith and credit of the U.S. Government. They are the issuer of all types of mortgage loans however are the only issuer of loans insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA) and the Office of Public and Indian Housing (PIH) and loans made by the U.S. Department of Agriculture (USDA) Rural Development Housing and Community Facilities Programs.

The difference between Ginnie Mae and Fannie and Freddie (created in 1970) is that Ginnie Mae is owned and operated by the U.S. Government within the Department of Housing and Urban Development (HUD), while Fannie and Freddie are private, shareholder owned corporations that are not directly (explicitly) supported or funded by the U.S. government.

Throughout history and as current market conditions show this is a distinction without a difference. It is clearly implied that Fannie and Freddie are backed by the government.

The GSE entities are regulated by the Office of Federal Housing Enterprise Oversight (OFHEO). The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 created this regulatory oversight to address the GSEs safety and soundness which is managed by OFHEO. It also established oversight to be sure the GSEs adhere to their affordable housing requirements which is monitored by the U.S. Department of Housing and Urban Development (HUD).

To give you an idea of the influence these entities have on the mortgage market note the size of the mortgage debt outstanding estimated by the Federal Reserve at $11.9 trillion by the end of 2007. Fannie and Freddie Macs residential mortgage debt held in portfolio or securitized reached $4.9 trillion or 41.4% of the total market by year end 2007.

The GSEs’ shares are increasing as of this writing due to the fact that the secondary market has seized up to the point that more loans are being directed to government backed programs where the liquidity still exists. Total mortgage originations (dollar volume of purchased loans) market share grew from 37.4% in 2006 to 75.6% in the fourth quarter of 2007 (OFHEO Report to Congress 2008, 2008).

These companies have been embroiled in an accounting scandal, investigations of their top officers. Fannie Mae is currently under a consent agreement (ordered to take various actions) and Freddie Mac is under a voluntary agreement to fix risk management, process problems and controls. 

“For the first time in four years, the Enterprises filed their annual financial statements on a timely basis. Significant progress was made in the remediation process, but OFHEO concludes that both companies remain classified as significant supervisory concerns. The primary reason for this classification has changed from previous years. The extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks, which have put additional pressure on their credit management, interest-rate risk management and financial modeling processes. As you will read in this report, they have made reasonable progress in these areas as well as in governance, internal controls, systems, and operational risk management; still, they both, to a varying extent, have significant further work to finalize their remediation efforts and test those improvements(OFHEO, 2008).”

The GSEs are providing a much needed stabilizing force in the mortgage market through this crisis as was the intent of their charter to begin with. But to continue to say the government guarantee is implicit rather than explicit because it is not written that way is now proven disingenuous. The American tax payer is subsidizing these entities, according to Congressional Budget Office (CBO) study in May of 1996 then to the tune of $6.5 billion in 1995, and is certainly responsible as the lender of last resort to these massive institutions.

With the current credit crisis in full swing we have suddenly lifted the GSEs out of their supervisory arrangements, lowered their capital requirements, and loosened underwriting criteria. Congress can do this again because, again, the taxpayer is behind them shouldering the risks. The interesting thing to watch will be private industries rush to pull it all back when the market normalizes as it surely will to increase their profits. In the meantime the GSEs will have captured most of the market, taken on significant risks, and have a completely different, worsening, risk profile.

So as of today the Fed and the U.S. Treasury Department are looking for ways to prop up these entities. Conversations include opening up the Fed Discount window which is the mechanism that has allowed banks and non-banks to borrow longer term funds using riskier collateral from the Fed. The other option being discussed is the outright purchase of the GSEs debt by the Fed. Each of these options, and frankly any others, will be shifting billions of dollars of risk to U.S. Taxpayer.

With mortgage insurance companies like PMI trying to stay oxygenated with the triad of pressure from skyrocketing insurance claims, continually lowered credit ratings and thus higher capital costs (if they can even access capital with their lower ratings) and reduced revenues because of all of these, the government owned and operated FHA will be the only viable mortgage insurance program left.

Why?

Because its government owned and will be subsidized by U.S. taxpayers as losses begin to exceed claim paying capability.

The American taxpayer has been pulled into supporting trillions of dollars of high risk mortgages now and in the future.

Do you think that’s ok? Do you think they should be allowed to stand on their own or fail on their own? Do you see any alternatives to these problems?

I look forward to any comments or suggestions you might have.