Archive for the ‘Financial Rescue Plan?’ Category

All You Need To Know About Bank Balance-Sheet Fraud

Friday, April 29th, 2011

All You Need To Know About Bank Balance-Sheet Fraud

The Market Ticker <http://market-ticker.denninger.net/>
Posted by Karl Denninger

 <http://market-ticker.denninger.net/authors/2-Karl-Denninger> 

I am constantly amused by those people who claim there is some vast “conspiracy” in this country when it comes to banks, balance sheets, and fraudulent lending and accounting. There is no conspiracy.

It is, in fact, “in your face” fraud.

The FDIC does us the courtesy of explaining it virtually every Friday night, right on their web page. <http://www.fdic.gov/news/news/press/2010/index.html>I am simply going to take last night’s bank closures, which numbered four.  One of them has no “deposit insurance fund” estimated loss available, because they didn’t find someone to take the assets – they’re just mailing checks.  But the other three do.Waterford Bank, Germantown MD <http://www.fdic.gov/news/news/press/2010/pr10045.html> : $155.6 million in assets, $156.4 in insured deposits.  They were “underwater” by $800,000, right?  Wrong:  Estimated loss, $51 million.  That is, the assets of $155.6 million were overvalued by approximately 30% at the time of seizure.Bank of Illinois, Normal IL <http://www.fdic.gov/news/news/press/2010/pr10044.html> : $211.7 million in assets, $198.5 million in deposits.  They were “underwater” by $13.2 million (which is why they were seized), right?  Wrong: Estimated loss $53.7 million.  That is, the the assets of $211.7 million were overvalued by more than 25% at the time of seizure.Sun American Bank, Boca Raton FL <

http://www.fdic.gov/news/news/press/2010/pr10043.html> :  $535.7 million in assets (so they claimed anyway), $443.5 million in total deposits.  Heh, why did you seize them – they have more assets than liabilities?  Oh wait: Estimated loss: $103.8 million, so the actual assets are worth $443.5 – $103.8, or $339.7 million.  That is, the assets of $535.7 million were overvalued by a whopping 37% at the time of seizure.This isn’t new, by the way.  In August of 2009 <http://market-ticker.denninger.net/archives/1352-We-Need-RTC-II-NOW.html>  I went through Colonial Bank’s failure based on BB&T’s presentation to its shareholders on the “merger” – and gift it was given by the FDIC.  It too showed that Colonial had been carrying assets on their books at a ridiculous 37% above where BB&T ultimately marked them as a whole.
Folks, your bank is being assessed deposit insurance premiums to pay for these losses.  You are paying these losses through increased fees and interest expense on your credit cards and all other manner of borrowing.You are paying for outrageous, pernicious and endemic balance sheet fraud.
There is no conspiracy.  It is right under your nose.  One of these three banks, based on their balance sheet, wasn’t even underwater – it was “to the good” by nearly $100 million dollars.The balance sheet was a flat, bald-faced lie.
You want to sit for this?
Why should you?
Now let’s ask the inconvenient question:

Are the big banks – specifically, Citibank, Bank of America, Wells Fargo and JP Morgan – all similarly overvaluing their assets?
Why should we believe they are not?  You can go through more than a year’s worth of FDIC bank seizure information and in essentially every single case you will find that overvaluations of somewhere from 20-50% have in fact occurred, yet not one indictment for book-cooking has issued.
So let’s be generous and assume that the “big banks” are over-valuing their assets by 25% – the lower end of the range of what the FDIC says is, through actual experience, what’s going on, and add it all up.
Bank of America <http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6877358-19747-27030&type=sect&dcn=0001193125-09-227720>  shows $2.25 trillion in assets.
Citibank <http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6877451-520470-529580&type=sect&dcn=0001047469-09-009754>  shows $1.89 trillion in assets.
JP Morgan/Chase <http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6879652-404464-409199&type=sect&dcn=0000950123-09-060099>  shows $2.04 trillion in assets.
And Wells Fargo <http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6443748-615551-618684&type=sect&dcn=0000950134-09-003967>  shows $1.31 trillion in assets.
This totals $7.49 trillion smackers.The FDIC’s experience with seizing banks thus far suggests quite strongly that all four of these entities are lying about these valuations, and that were they to be seized the loss embedded in them (and for which you, the taxpayer would be responsible) is somewhere between $1.49 and $2.99 trillion dollars.Incidentally, neither the FDIC or Treasury happens to have either $1.49 or $2.99 trillion laying around, and it is highly questionable if they could raise it, should that become necessary.

Now of course neither you or I can prove this is correct.  However, we can look at the FDIC’s own published bank closing statements, and derive from them a pattern stretching back more than a year now that has disclosed that in essentially each and every case the banks in question have overvalued their assets by anywhere from 20-40%, and that as of the day of the seizure such an overvaluation was in fact a continuing and ongoing practice.

Back in the beginning of 2009 we had people argue that “mark to market” was invalid – that in fact the market-based pricing losses that were being claimed were ridiculous and would never happen.  One of the claimants was the Federal Home Loan Bank of Seattle, which said that the $300 million in mark-to-market losses would not actually happen – that the real loss was only going to be $12 million dollars.

FHLB Seattle recently filed suit <http://market-ticker.denninger.net/archives/2005-Clap-Clap-Weil-and-The-Mark-To-Market-Scam.html>  against the bundlers of this trash, claiming, surprise-surprise, that the real loss is not $12 million, not $300 million, but $311 million – on that bundle of trash alone.  In all they are seeking $2 billion in damages.We have now learned, a year into this “experiment” with mark-to-model promulgated at gunpoint by Congress that:
The banks indeed have been lying about asset valuation and the proof comes in the form of the FDIC seizures, which in essentially case have documented massive and outrageous overvaluation of assets on bank balance sheets.The claimed “mark to model” losses, which were tiny compared to the market-price losses, were in fact fictions, to the point that the poster child of the “mark to model” argument is now suing the purveyors of the instruments supposedly not to be marked to the market for losses that exceed what the market-based loss was back in March of 2009. 

If you wish to argue that the economy and banking system are recovering their health, you must deal with this.  If indeed large bank balance sheets are concealing a deficiency of somewhere between $1.5 and $3 trillion in losses not only will the economy and lending environment not recover it can’t as the large banks all know the truth.

I believe this is why those very same banks are hoarding cash.  I believe they know that at some point in the future – a point not under their control – the truth may come out and if it does an instantaneous run would occur – not just on their bank, but on all banks.  Such an event could be defended against only with a huge cash hoard – a hoard that, if they lend out said cash, would not be available to them.

The Federal Reserve knows this too.  I believe this is why there is nearly $1 trillion of “excess reserves” sitting at The Fed <http://research.stlouisfed.org/fred2/series/NFORBRES> , up from nearly zero prior to the crisis – it is these large banks’ “backstop” against a potential run should the truth of their balance sheets reach public conscience.The political and regulatory bottom line is simple: As I have repeatedly maintained for nearly three years, we now have the facts from our own government agencies, most particularly the FDIC: The banks have been and still are cooking their books in a manner that intentionally overstates their asset valuations – an act that is exactly identical to that which brought down ENRON.
       

Tags:,
Posted in Financial Rescue Plan?, The Economy | No Comments »

All You Need To Know About Bank Balance-Sheet Fraud

Monday, March 8th, 2010

 All You Need To Know About Bank Balance-Sheet Fraud

The Market Ticker

Posted by Karl Denninger 

I am constantly amused by those people who claim there is some vast “conspiracy” in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.

There is no conspiracy.

It is, in fact, “in your face” fraud.

The FDIC does us the courtesy of explaining it virtually every Friday night, right on their web page.

I am simply going to take last night’s bank closures, which numbered four.  One of them has no “deposit insurance fund” estimated loss available, because they didn’t find someone to take the assets – they’re just mailing checks.  But the other three do.

 

Waterford Bank, Germantown MD: $155.6 million in assets, $156.4 in insured deposits.  They were “underwater” by $800,000, right?  Wrong:  Estimated loss, $51 million.  That is, the assets of $155.6 million were overvalued by approximately 30% at the time of seizure.

Bank of Illinois, Normal IL: $211.7 million in assets, $198.5 million in deposits.  They were “underwater” by $13.2 million (which is why they were seized), right?  Wrong: Estimated loss $53.7 million.  That is, the the assets of $211.7 million were overvalued by more than 25% at the time of seizure.

Sun American Bank, Boca Raton FL:  $535.7 million in assets (so they claimed anyway), $443.5 million in total deposits.  Heh, why did you seize them – they have more assets than liabilities?  Oh wait: Estimated loss: $103.8 million, so the actual assets are worth $443.5 – $103.8, or $339.7 million.  That is, the assets of $535.7 million were overvalued by a whopping 37% at the time of seizure.

This isn’t new, by the way.  In August of 2009 I went through Colonial Bank’s failure based on BB&T’s presentation to its shareholders on the “merger” – and gift it was given by the FDIC.  It too showed that Colonial had been carrying assets on their books at a ridiculous 37% above where BB&T ultimately marked them as a whole.

Folks, your bank is being assessed deposit insurance premiums to pay for these losses.  You are paying these losses through increased fees and interest expense on your credit cards and all other manner of borrowing.

You are paying for outrageous, pernicious and endemic balance sheet fraud.

There is no conspiracy.  It is right under your nose.  One of these three banks, based on their balance sheet, wasn’t even underwater – it was “to the good” by nearly $100 million dollars.

The balance sheet was a flat, bald-faced lie.

You want to sit for this?

Why should you?

Now let’s ask the inconvenient question:

Are the big banks – specifically, Citibank, Bank of America, Wells Fargo and JP Morgan – all similarly overvaluing their assets?

Why should we believe they are not?  You can go through more than a year’s worth of FDIC bank seizure information and in essentially every single case you will find that overvaluations of somewhere from 20-50% have in fact occurred, yet not one indictment for book-cooking has issued.

So let’s be generous and assume that the “big banks” are over-valuing their assets by 25% – the lower end of the range of what the FDIC says is, through actual experience, what’s going on, and add it all up.

Bank of America shows $2.25 trillion in assets.

Citibank shows $1.89 trillion in assets.

JP Morgan/Chase shows $2.04 trillion in assets.

And Wells Fargo shows $1.31 trillion in assets.

This totals $7.49 trillion smackers.

The FDIC’s experience with seizing banks thus far suggests quite strongly that all four of these entities are lying about these valuations, and that were they to be seized the loss embedded in them (and for which you, the taxpayer would be responsible) is somewhere between $1.49 and $2.99 trillion dollars.

Incidentally, neither the FDIC or Treasury happens to have either $1.49 or $2.99 trillion laying around, and it is highly questionable if they could raise it, should that become necessary.

Now of course neither you or I can prove this is correct.  However, we can look at the FDIC’s own published bank closing statements, and derive from them a pattern stretching back more than a year now that has disclosed that in essentially each and every case the banks in question have overvalued their assets by anywhere from 20-40%, and that as of the day of the seizure such an overvaluation was in fact a continuing and ongoing practice.

Back in the beginning of 2009 we had people argue that “mark to market” was invalid – that in fact the market-based pricing losses that were being claimed were ridiculous and would never happen.  One of the claimants was the Federal Home Loan Bank of Seattle, which said that the $300 million in mark-to-market losses would not actually happen – that the real loss was only going to be $12 million dollars.

FHLB Seattle recently filed suit against the bundlers of this trash, claiming, surprise-surprise, that the real loss is not $12 million, not $300 million, but $311 million – on that bundle of trash alone.  In all they are seeking $2 billion in damages.

We have now learned, a year into this “experiment” with mark-to-model promulgated at gunpoint by Congress that:

The banks indeed have been lying about asset valuation and the proof comes in the form of the FDIC seizures, which in essentially case have documented massive and outrageous overvaluation of assets on bank balance sheets.

The claimed “mark to model” losses, which were tiny compared to the market-price losses, were in fact fictions, to the point that the poster child of the “mark to model” argument is now suing the purveyors of the instruments supposedly not to be marked to the market for losses that exceed what the market-based loss was back in March of 2009. 

If you wish to argue that the economy and banking system are recovering their health, you must deal with this.  If indeed large bank balance sheets are concealing a deficiency of somewhere between $1.5 and $3 trillion in losses not only will the economy and lending environment not recover it can’t as the large banks all know the truth.

I believe this is why those very same banks are hoarding cash.  I believe they know that at some point in the future – a point not under their control – the truth may come out and if it does an instantaneous run would occur – not just on their bank, but on all banks.  Such an event could be defended against only with a huge cash hoard – a hoard that, if they lend out said cash, would not be available to them.

The Federal Reserve knows this too.  I believe this is why there is nearly $1 trillion of “excess reserves” sitting at The Fed, up from nearly zero prior to the crisis – it is these large banks’ “backstop” against a potential run should the truth of their balance sheets reach public conscience.

The political and regulatory bottom line is simple: As I have repeatedly maintained for nearly three years, we now have the facts from our own government agencies, most particularly the FDIC: The banks have been and still are cooking their books in a manner that intentionally overstates their asset valuations – an act that is exactly identical to that which brought down ENRON.

Tags:,
Posted in Bail-Out, Financial Rescue Plan?, The Economy | No Comments »

Deception at Core of Obama Plans

Saturday, March 7th, 2009

 

March 06, 2009

By Charles Krauthammer

WASHINGTON — Forget the pork. Forget the waste. Forget the 8,570 earmarks in a bill supported by a president who poses as the scourge of earmarks. Forget the “$2 trillion dollars in savings” that “we have already identified,” $1.6 trillion of which President Obama’s budget director later admits is the “savings” of not continuing the surge in Iraq until 2019 — 11 years after George Bush ended it, and eight years after even Bush would have had us out of Iraq completely.

Forget all of this. This is run-of-the-mill budget trickery. True, Obama’s tricks come festooned with strings of zeros tacked onto the end. But that’s a matter of scale, not principle.

All presidents do that. But few undertake the kind of brazen deception at the heart of Obama’s radically transformative economic plan, a rhetorical sleight of hand so smoothly offered that few noticed.

The logic of Obama’s address to Congress went like this:

“Our economy did not fall into decline overnight,” he averred. Indeed, it all began before the housing crisis. What did we do wrong? We are paying for past sins in three principal areas: energy, health care, and education — importing too much oil and not finding new sources of energy (as in the Arctic National Wildlife Refuge and the Outer Continental Shelf?), not reforming health care, and tolerating too many bad schools.

The “day of reckoning” has now arrived. And because “it is only by understanding how we arrived at this moment that we’ll be able to lift ourselves out of this predicament,” Obama has come to redeem us with his far-seeing program of universal, heavily nationalized health care; a cap-and-trade tax on energy; and a major federalization of education with universal access to college as the goal.

Amazing. As an explanation of our current economic difficulties, this is total fantasy. As a cure for rapidly growing joblessness, a massive destruction of wealth, a deepening worldwide recession, this is perhaps the greatest non sequitur ever foisted upon the American people.

At the very center of our economic near-depression is a credit bubble, a housing collapse and a systemic failure of the entire banking system. One can come up with a host of causes: Fannie Mae and Freddie Mac pushed by Washington (and greed) into improvident loans, corrupted bond-ratings agencies, insufficient regulation of new and exotic debt instruments, the easy money policy of Alan Greenspan’s Fed, irresponsible bankers pushing (and then unloading in packaged loan instruments) highly dubious mortgages, greedy house-flippers, deceitful homebuyers.

The list is long. But the list of causes of the collapse of the financial system does not include the absence of universal health care, let alone of computerized medical records. Nor the absence of an industry-killing cap-and-trade carbon levy. Nor the lack of college graduates. Indeed, one could perversely make the case that, if anything, the proliferation of overeducated, Gucci-wearing, smart-ass MBAs inventing ever more sophisticated and opaque mathematical models and debt instruments helped get us into this credit catastrophe in the first place.

And yet with our financial house on fire, Obama makes clear both in his speech and his budget that the essence of his presidency will be the transformation of health care, education and energy. Four months after winning the election, six weeks after his swearing in, Obama has yet to unveil a plan to deal with the banking crisis.

What’s going on? “You never want a serious crisis to go to waste,” said Chief of Staff Rahm Emanuel. “This crisis provides the opportunity for us to do things that you could not do before.”

Things. Now we know what they are. The markets’ recent precipitous decline is a reaction not just to the absence of any plausible bank rescue plan, but also to the suspicion that Obama sees the continuing financial crisis as usefully creating the psychological conditions — the sense of crisis bordering on fear-itself panic — for enacting his “Big Bang” agenda to federalize and/or socialize health care, education and energy, the commanding heights of post-industrial society.

Clever politics, but intellectually dishonest to the core. Health, education and energy — worthy and weighty as they may be — are not the cause of our financial collapse. And they are not the cure. The fraudulent claim that they are both cause and cure is the rhetorical device by which an ambitious president intends to enact the most radical agenda of social transformation seen in our lifetime.

 

letters@charleskrauthammer.com

Copyright 2009, Washington Post Writers Group

Tags:,
Posted in Financial Rescue Plan?, Liberal Agenda | No Comments »

Upside Down and Out of Luck

Friday, March 6th, 2009

Upside Down and Out of Luck
by Mike Larson

Mike Larson

This week, the Obama administration released the details of how its expanded refinance and mortgage modification programs will work. I’ve combed through the details. And the view I shared with you two weeks ago in my Money and Markets column remains the same: There’s some good, some bad — and one glaring flaw …

We’re still not attacking the “upside down” problem head on!

What do I mean by that? Let me explain …

Falling Sales and Falling Prices Are Leaving More and More Homeowners Upside Down …

During the bubble days, when home prices were soaring, lenders and borrowers went hog wild. The monthly turnover of the U.S. housing stock surged, while home prices soared. One hundred percent financing was widely offered, either as single loans or “80-20” combinations of first and second mortgages.

Now that the housing bubble has popped, 'For Sale' signs are sprouting up like weeds, and prices are plummeting.
Now that the housing bubble has popped, “For Sale” signs are sprouting up like weeds, and prices are plummeting.

This resulted in ever-increasing numbers of homes changing hands at ever-increasing values, funded by larger and larger mortgages at higher and higher loan-to-value ratios.

And now, it’s all coming unglued …

  • New home sales plunged to an annual rate of 309,000 in January. That was down more than 10 percent from December and the lowest level in recorded U.S. history (which goes back to 1963).
  • Sales of existing, single-family homes have dropped to the lowest level in eleven and a half years, with no end to the declines in sight.
  • The median price of a new home is down to $201,100 — the lowest since December 2003. Existing home prices have fallen to a median of $170,300 — the lowest in almost six years.
  • The S&P/Case-Shiller Index shows prices in the 20 top metropolitan areas plunging 18.6 percent from a year earlier, the biggest drop on record. Individual markets are even worse: Phoenix is down 34 percent; Las Vegas, down 33 percent; San Francisco, down 31.2 percent.
  • And it’s not just the bubble markets that are losing value now, either. A recent National Association of Realtors report showed a whopping 134 of 153 U.S. metropolitan areas experienced year-over-year price declines in the fourth quarter of 2008. That’s 88 percent of the U.S., up from 79 percent the prior quarter and the highest on record!

Result: An ever-increasing share of U.S. borrowers are now “upside down” or “underwater” on their homes. In other words, they owe more than their homes are worth — in some cases much more.

We’re talking about 8.3 million households … with another 10.5 million getting close to the negative equity edge — meaning they’ll be upside down if prices fall an additional 5 percent or less.

That’s 19.8 percent of ALL U.S. homes with mortgages that are now underwater, according to the research firm FirstAmerican CoreLogic. And if you include those homes that are near negative equity, you get a whopping 25 percent of mortgaged U.S. homes. One in four!

As you might expect, the numbers are much worse in some states, too:

  • Some 59 percent of Nevada borrowers are either already underwater or close to it …
  • 48 percent of Michigan homeowners with mortgages are suffering the same fate …
  • As are 37 percent in Arizona, 35 percent in Florida, and 34 percent in California!
Obama and his team still aren't attacking this problem head on. And the latest plan is going to exclude a sizable chunk of homeowners.
Obama and his team still aren’t attacking this problem head on. And the latest plan is going to exclude a sizable chunk of homeowners.

Yet once again, the Obama plan does not attack this problem head on. The Fannie-Freddie refinance part of the program only allows people to refinance if they are in the 80 percent to 105 percent loan-to-value “bucket.” Given the magnitude of the price declines I spelled out earlier, that’s going to exclude a sizable chunk of homeowners.

The modification portion of the program will also follow what’s known as a “waterfall” structure. It spells out the steps a servicer has to go through, one by one, to get the borrower’s monthly payments down to 31% of their income.

The first step? Lower the interest rate to as little as 2 percent.

If that doesn’t work, you move on to the second step: Extend the amortization or term of the loan to as long as 40 years.

Third? Forbear principal. That means you would no longer have to pay interest on a portion of the loan principal, but it wouldn’t be eliminated. You would still have to pay it back as a balloon payment when you sell the home or refinance.

At no point in the process is the cramming down of principal stressed. The program doesn’t PREVENT a servicer from doing it. But they’ve been extremely reluctant to do so to date.

One study in California found that less than 1 percent of the 88,830 loan modifications implemented in the first three quarters of 2008 included principal reductions. That compared to 47 percent where interest rates were cut. Throw in the fact the latest Obama program emphasizes steps other than principal reductions and I seriously doubt lenders will make widespread cuts.

And therein lies the problem …

All This Will Lead to More “Jingle Mail”

When borrowers are upside down, a sense of futility and hopelessness can set in: They wonder why the heck they’re making monthly mortgage payments when their house is continuing to depreciate!

Desperate homeowners will take advantage of Obama's plan. But if anything knocks their finances for a loop, they' ll pop their keys in an envelope and send them off to their lender.
Desperate homeowners will take advantage of Obama’s plan. But if anything knocks their finances for a loop, they’ll pop their keys in an envelope and send them off to their lender.

Here’s another thing: Higher loan-to-value ratio mortgages have ALWAYS had higher default rates than lower LTV ones. Why? When borrowers have none of their money at risk — skin in the game, if you will — they have no vested interest in sticking with the property. They’re giving up nothing by walking away.

Sure, they’ll take the lower payments they’re going to be offered as part of the Obama modification plan. Sure, they’ll stick around for a while. But if anything … anything … throws their financial situation off balance, a high percentage of them will resort to “jingle mail” — meaning, they’ll pop their keys in an envelope and send it off to their lender.

By the way, that option could be extremely attractive right now because rental property has flooded the market, and landlords are perfectly willing to cut deals. The nationwide rental vacancy rate was 10.1 percent in the fourth quarter of 2008, up from 9.6 percent a year earlier and just shy of the 2004 high of 10.4 percent. That level was the highest in the 49 years the Census Bureau has been tracking the data.

Figures from the National Multi-Housing Council’s confirm the rental market is extremely soft. The NMHC’s Market Tightness Index came in at a paltry 11 in the January survey, down from 24 a quarter earlier and the lowest in seven years.

So I’ll repeat what I said back on February 20:

“Unless and until you give borrowers an incentive to stick around … to ride out the tough times … by reducing their principal balances to levels that actually reflect some semblance of reality, you’re going to see many of these loan modifications fail.”

And that means many of the foreclosures the latest plans aim to prevent will just be postponed.

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Tags:, ,
Posted in Bail-Out, Financial Rescue Plan?, The Economy, US Politics | No Comments »

50 De-Stimulating Facts

Thursday, February 5th, 2009

Posted on February 5, 2009

Chapter and verse on a bad bill

By Stephen Spruiell & Kevin Williamson

Senate Democrats acknowledged Wednesday that they do not have the votes to pass the stimulus bill in its current form. This is unexpected good news. The House passed the stimulus package with zero Republican votes (and even a few Democratic defections), but few expected Senate Republicans (of whom there are only 41) to present a unified front. A few moderate Democrats have reportedly joined them.The idea that the government can spend the economy out of a recession is highly questionable, and even with Senate moderates pushing for changes, the current package is unlikely to see much improvement. Nevertheless, this presents an opportunity to remove some of the most egregious spending, to shrink some programs, and to add guidelines where the initial bill called for a blank check. Here are 50 of the most outrageous items in the stimulus package:

VARIOUS LEFT-WINGERY

The easiest targets in the stimulus bill are the ones that were clearly thrown in as a sop to one liberal cause or another, even though the proposed spending would have little to no stimulative effect. The National Endowment for the Arts, for example, is in line for $50 million, increasing its total budget by a third. The unemployed can fill their days attending abstract-film festivals and sitar concerts.

Then there are the usual welfare-expansion programs that sound nice but repeatedly fail cost-benefit analyses. The bill provides $380 million to set up a rainy-day fund for a nutrition program that serves low-income women and children, and $300 million for grants to combat violence against women. Laudable goals, perhaps, but where’s the economic stimulus? And the bill would double the amount spent on federal child-care subsidies. Brian Riedl, a budget expert with the Heritage Foundation, quips, “Maybe it’s to help future Obama cabinet secretaries, so that they don’t have to pay taxes on their nannies.”

Perhaps spending $6 billion on university building projects will put some unemployed construction workers to work, but how does a $15 billion expansion of the Pell Grant program meet the standard of “temporary, timely, and targeted”? Another provision would allocate an extra $1.2 billion to a “youth” summer-jobs program—and increase the age-eligibility limit from 21 to 24. Federal job-training programs—despite a long track record of failure—come in for $4 billion total in additional funding through the stimulus.

Of course, it wouldn’t be a liberal wish list if it didn’t include something for ACORN, and sure enough, there is $5.2 billion for community-development block grants and “neighborhood stabilization activities,” which ACORN is eligible to apply for. Finally, the bill allocates $650 million for activities related to the switch from analog to digital TV, including $90 million to educate “vulnerable populations” that they need to go out and get their converter boxes or lose their TV signals. Obviously, this is stimulative stuff: Any economist will tell you that you can’t get higher productivity and economic growth without access to reruns of Family Feud.

Summary:

$50 million for the National Endowment for the Arts

$380 million in the Senate bill for the Women, Infants and Children program

$300 million for grants to combat violence against women

$2 billion for federal child-care block grants

$6 billion for university building projects

$15 billion for boosting Pell Grant college scholarships

$4 billion for job-training programs, including $1.2 billion for “youths” up to the age of 24

$1 billion for community-development block grants

$4.2 billion for “neighborhood stabilization activities”

$650 million for digital-TV coupons; $90 million to educate “vulnerable populations”

POORLY DESIGNED TAX RELIEF

The stimulus package’s tax provisions are poorly designed and should be replaced with something closer to what the Republican Study Committee in the House has proposed. Obama would extend some of the business tax credits included in the stimulus bill Congress passed about a year ago, and this is good as far as it goes. The RSC plan, however, also calls for a cut in the corporate-tax rate that could be expected to boost wages, lower prices, and increase profits, stimulating economic activity across the board.The RSC plan also calls for a 5 percent across-the-board income-tax cut, which would increase productivity by providing additional incentives to save, work, and invest. An across-the-board payroll-tax cut might make even more sense, especially for low- to middle-income workers who don’t make enough to pay income taxes. Obama’s “Making Work Pay” tax credit is aimed at helping these workers, but it uses a rebate check instead of a rate cut. Rebate checks are not effective stimulus, as we discovered last spring: They might boost consumption, a little, but that’s all they do.Finally, the RSC proposal provides direct tax relief to strapped families by expanding the child tax credit, reducing taxes on parents’ investment in the next generation of taxpayers. Obama’s expansion of the child tax credit is not nearly as ambitious. Overall, his plan adds up to a lot of forgone revenue without much stimulus to show for it. Senators should push for the tax relief to be better designed.Summary:

$15 billion for business-loss carry-backs

$145 billion for “Making Work Pay” tax credits

$83 billion for the earned income credit

STIMULUS FOR THE GOVERNMENT

Even as their budgets were growing robustly during the Bush administration, many federal agencies couldn’t find the money to keep up with repairs—at least that’s the conclusion one is forced to draw from looking at the stimulus bill. Apparently the entire capital is a shambles. Congress has already removed $200 million to fix up the National Mall after word of that provision leaked out and attracted scorn. But one fixture of the mall—the Smithsonian—dodged the ax: It’s slated to receive $150 million for renovations.The stimulus package is packed with approximately $7 billion worth of federal building projects, including $34 million to fix up the Commerce Department, $500 million for improvements to National Institutes of Health facilities, and $44 million for repairs at the Department of Agriculture. The Agriculture Department would also get $350 million for new computers—the better to calculate all the new farm subsidies in the bill (see “Pure pork” below).One theme in this bill is superfluous spending items coated with green sugar to make them more palatable. Both NASA and NOAA come in for appropriations that properly belong in the regular budget, but this spending apparently qualifies for the stimulus bill because part of the money from each allocation is reserved for climate-change research. For instance, the bill grants NASA $450 million, but it states that the agency must spend at least $200 million on “climate-research missions,” which raises the question: Is there global warming in space?

The bottom line is that there is a way to fund government agencies, and that is the federal budget, not an “emergency” stimulus package. As Riedl puts it, “Amount allocated to the Census Bureau? $1 billion. Jobs created? None.”

Summary:

$150 million for the Smithsonian

$34 million to renovate the Department of Commerce headquarters

$500 million for improvement projects for National Institutes of Health facilities

$44 million for repairs to Department of Agriculture headquarters

$350 million for Agriculture Department computers

$88 million to help move the Public Health Service into a new building

$448 million for constructing a new Homeland Security Department headquarters

$600 million to convert the federal auto fleet to hybrids

$450 million for NASA (carve-out for “climate-research missions”)

$600 million for NOAA (carve-out for “climate modeling”)

$1 billion for the Census Bureau

INCOME TRANSFERS

A big chunk of the stimulus package is designed not to create wealth but to spread it around. It contains $89 billion in Medicaid extensions and $36 billion in expanded unemployment benefits—and this is in addition to the state-budget bailout (see “Rewarding state irresponsibility” below).The Medicaid extension is structured as a temporary increase in the federal match, but make no mistake: Like many spending increases in the stimulus package, this one has a good chance of becoming permanent. As for extending unemployment benefits through the downturn, it might be a good idea for other reasons, but it wouldn’t stimulate economic growth: It would provide an incentive for job-seekers to delay reentry into the workforce.Summary:

$89 billion for Medicaid

$30 billion for COBRA insurance extension

$36 billion for expanded unemployment benefits

$20 billion for food stamps

PURE PORK

The problem with trying to spend $1 trillion quickly is that you end up wasting a lot of it. Take, for instance, the proposed $4.5 billion addition to the U.S. Army Corps of Engineers budget. Not only does this effectively double the Corps’ budget overnight, but it adds to the Corps’ $3.2 billion unobligated balance—money that has been appropriated, but that the Corps has not yet figured out how to spend. Keep in mind, this is an agency that is often criticized for wasting taxpayers’ money. “They cannot spend that money wisely,” says Steve Ellis of Taxpayers for Common Sense. “I don’t even think they can spend that much money unwisely.”Speaking of spending money unwisely, the stimulus bill adds another $850 million for Amtrak, the railroad that can’t turn a profit. There’s also $1.7 billion for “critical deferred maintenance needs” in the National Park System, and $55 million for the preservation of historic landmarks. Also, the U.S. Coast Guard needs $87 million for a polar icebreaking ship—maybe global warming isn’t working fast enough.It should come as no surprise that rural communities—those parts of the nation that were hardest hit by rampant real-estate speculation and the collapse of the investment-banking industry—are in dire need of an additional $7.6 billion for “advancement programs.” Congress passed a $300 billion farm bill last year, but apparently that wasn’t enough. This bill provides additional subsidies for farmers, including $150 million for producers of livestock, honeybees, and farm-raised fish.

Summary:

$4.5 billion for U.S. Army Corps of Engineers

$850 million for Amtrak

$87 million for a polar icebreaking ship

$1.7 billion for the National Park System

$55 million for Historic Preservation Fund

$7.6 billion for “rural community advancement programs”

$150 million for agricultural-commodity purchases

$150 million for “producers of livestock, honeybees, and farm-raised fish”

RENEWABLE WASTE

Open up the section of the stimulus devoted to renewable energy and what you find is anti-stimulus: billions of dollars allocated to money-losing technologies that have not proven cost-efficient despite decades of government support. “Green energy” is not a new idea, Riedl points out. The government has poured billions into loan-guarantees and subsidies and has even mandated the use of ethanol in gasoline, to no avail. “It is the triumph of hope over experience,” he says, “to think that the next $20 billion will magically transform the economy.”Many of the renewable-energy projects in the stimulus bill are duplicative. It sets aside $3.5 billion for energy efficiency and conservation block grants, and $3.4 billion for the State Energy Program. What’s the difference? Well, energy efficiency and conservation block grants “assist eligible entities in implementing energy efficiency and conservation strategies,” while the State Energy Program “provides funding to states to design and carry out their own energy efficiency and renewable energy programs.”While some programs would spend lavishly on technologies that are proven failures, others would spend too little to make a difference. The stimulus would spend $4.5 billion to modernize the nation’s electricity grid. But as Robert Samuelson has pointed out, “An industry study in 2004—surely outdated—put the price tag of modernizing the grid at $165 billion.” Most important, the stimulus bill is not the place to make these changes. There is a regular authorization process for energy spending; Obama is just trying to take a shortcut around it.

Summary:

$2 billion for renewable-energy research ($400 million for global-warming research)

$2 billion for a “clean coal” power plant in Illinois

$6.2 billion for the Weatherization Assistance Program

$3.5 billion for energy-efficiency and conservation block grants

$3.4 billion for the State Energy Program

$200 million for state and local electric-transport projects

$300 million for energy-efficient-appliance rebate programs

$400 million for hybrid cars for state and local governments

$1 billion for the manufacturing of advanced batteries

$1.5 billion for green-technology loan guarantees

$8 billion for innovative-technology loan-guarantee program

$2.4 billion for carbon-capture demonstration projects

$4.5 billion for electricity grid

REWARDING STATE IRRESPONSIBILITY

One of the ugliest aspects of the stimulus package is a bailout for spendthrift state legislatures. Remember the old fable about the ant and the grasshopper? In Aesop’s version, the happy-go-lucky grasshopper realizes the error of his ways when winter comes and he goes hungry while the industrious ant lives on his stores. In Obama’s version, the federal government levies a tax on the ant and redistributes his wealth to the party-hearty grasshopper, who just happens to belong to a government-employees’ union. This happens through something called the “State Fiscal Stabilization Fund,” by which taxpayers in the states that have exercised financial discipline are raided to subsidize Democratic-leaning Electoral College powerhouses—e.g., California—that have spent their way into big trouble.The state-bailout fund has a built-in provision to channel the money to the Democrats’ most reliable group of campaign donors: the teachers’ unions. The current bill requires that a fixed percentage of the bailout money go toward ensuring that school budgets are not reduced below 2006 levels. Given that the fastest-growing segment of public-school expense is administrators’ salaries—not teachers’ pay, not direct spending on classroom learning—this is a requirement that has almost nothing to do with ensuring high-quality education and everything to do with ensuring that the school bureaucracy continues to be a cash cow for Democrats.Setting aside this obvious sop to Democratic constituencies, the State Fiscal Stabilization Fund is problematic in that it creates a moral hazard by punishing the thrifty to subsidize the extravagant. California, which has suffered the fiscal one-two punch of a liberal, populist Republican governor and a spendthrift Democratic legislature, is in the worst shape, but even this fiduciary felon would have only to scale back spending to Gray Davis–era levels to eliminate its looming deficit. (The Davis years are not remembered as being especially austere.) Pennsylvania is looking to offload much of its bloated corrections-system budget onto Uncle Sam in order to shunt funds to Gov. Ed Rendell’s allies at the county-government level, who will use that largesse to put off making hard budgetary calls and necessary reforms. Alaska is looking for a billion bucks, including $630 million for transportation projects—not a great sign for the state that brought us the “Bridge to Nowhere” fiasco.

Other features leap out: Of the $4 billion set aside for the Community Oriented Policing Services—COPS—program, half is allocated for communities of fewer than 150,000 people. That’s $2 billion to fight nonexistent crime waves in places like Frog Suck, Wyo., and Hoople, N.D.

The great French economist Frédéric Bastiat called politics “the great fiction through which everybody endeavors to live at the expense of everybody else.” But who pays for the state bailout? Savers will pay to bail out spenders, and future generations will pay to bail out the undisciplined present.In sum, this is an $80 billion boondoggle that is going to reward the irresponsible and help state governments evade a needed reordering of their financial priorities. And the money has to come from somewhere: At best, we’re just shifting money around from jurisdiction to jurisdiction, robbing a relatively prudent Cheyenne to pay an incontinent Albany. If we want more ants and fewer grasshoppers, let the prodigal governors get a little hungry.Summary:

$79 billion for State Fiscal Stabilization Fund

— Stephen Spruiell is a staff reporter for National Review Online. Kevin Williamson is a deputy managing editor of National Review.

Tags:
Posted in Bail-Out, Financial Rescue Plan?, Liberal Agenda, The Economy | No Comments »

Even Bill Clinton Blames Barney Frank

Monday, October 6th, 2008

Lawmaker Accused of Fannie Mae Conflict of Interest

Friday October 03, 2008

Washington

Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank’s efforts to deregulate Fannie Mae throughout the 1990s.

So did Frank’s partner, a Fannie Mae executive at the forefront of the agency’s push to relax lending restrictions.

Now that Fannie Mae is at the epicenter of a financial meltdown that threatens the U.S. economy, some are raising new questions about Frank’s relationship with Herb Moses, who was Fannie’s assistant director for product initiatives. Moses worked at the government-sponsored enterprise from 1991 to 1998, while Frank was on the House Banking Committee, which had jurisdiction over Fannie.

Both Frank and Moses assured the Wall Street Journal in 1992 that they took pains to avoid any conflicts of interest. Critics, however, remain skeptical.

“It’s absolutely a conflict,” said Dan Gainor, vice president of the Business & Media Institute. “He was voting on Fannie Mae at a time when he was involved with a Fannie Mae executive. How is that not germane?

“If this had been his ex-wife and he was Republican, I would bet every penny I have – or at least what’s not in the stock market – that this would be considered germane,” added Gainor, a T. Boone Pickens Fellow. “But everybody wants to avoid it because he’s gay. It’s the quintessential double standard.”

A top GOP House aide agreed.

“C’mon, he writes housing and banking laws and his boyfriend is a top exec at a firm that stands to gain from those laws?” the aide told FOX News. “No media ever takes note? Imagine what would happen if Frank’s political affiliation was R instead of D? Imagine what the media would say if [GOP former] Chairman [Mike] Oxley’s wife or [GOP presidential nominee John] McCain’s wife was a top exec at Fannie for a decade while they wrote the nation’s housing and banking laws.”

Frank’s office did not immediately respond to requests for comment.

Frank met Moses in 1987, the same year he became the first openly gay member of Congress.

“I am the only member of the congressional gay spouse caucus,” Moses wrote in the Washington Post in 1991. “On Capitol Hill, Barney always introduces me as his lover.”

The two lived together in a Washington home until they broke up in 1998, a few months after Moses ended his seven-year tenure at Fannie Mae, where he was the assistant director of product initiatives. According to National Mortgage News, Moses “helped develop many of Fannie Mae’s affordable housing and home improvement lending programs.”

Critics say such programs led to the mortgage meltdown that prompted last month’s government takeover of Fannie Mae and its financial cousin, Freddie Mac. The giant firms are blamed for spreading bad mortgages throughout the private financial sector.

Although Frank now blames Republicans for the failure of Fannie and Freddie, he spent years blocking GOP lawmakers from imposing tougher regulations on the mortgage giants. In 1991, the year Moses was hired by Fannie, the Boston Globe reported that Frank pushed the agency to loosen regulations on mortgages for two- and three-family homes, even though they were defaulting at twice and five times the rate of single homes, respectively.

Three years later, President Clinton’s Department of Housing and Urban Development tried to impose a new regulation on Fannie, but was thwarted by Frank. Clinton now blames such Democrats for planting the seeds of today’s economic crisis.

“I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president, to put some standards and tighten up a little on Fannie Mae and Freddie Mac,” Clinton said recently.

Bill Sammon is FOX News’ Washington Deputy Managing Editor.

Tags:, , , ,
Posted in Campaign 2008, Financial Rescue Plan?, The Economy | No Comments »

Frank’s fingerprints are all over the financial fiasco

Saturday, October 4th, 2008

“THE PRIVATE SECTOR got us into this mess. The government has to get us out of it.”
That’s Barney Frank’s story, and he’s sticking to it. As the Massachusetts Democrat has explained it in recent days, the current financial crisis is the spawn of the free market run amok, with the political class guilty only of failing to rein the capitalists in. The Wall Street meltdown was caused by “bad decisions that were made by people in the private sector,” Frank said; the country is in dire straits today “thanks to a conservative philosophy that says the market knows best.” And that philosophy goes “back to Ronald Reagan, when at his inauguration he said, ‘Government is not the answer to our problems; government is the problem.’ ”

In fact, that isn’t what Reagan said. His actual words were: “In this present crisis, government is not the solution to our problem; government is the problem.” Were he president today, he would be saying much the same thing.

Because while the mortgage crisis convulsing Wall Street has its share of private-sector culprits — many of whom have been learning lately just how pitiless the private sector’s discipline can be — they weren’t the ones who “got us into this mess.” Barney Frank’s talking points notwithstanding, mortgage lenders didn’t wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so – or else.

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and “redlining” because urban blacks were being denied mortgages at a higher rate than suburban whites.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to “meet the credit needs” of “low-income, minority, and distressed neighborhoods.” Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this “subprime” lending by authorizing ever more “flexible” criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. “Lack of credit history should not be seen as a negative factor,” the Fed’s guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as “valid income sources” to qualify for a mortgage. Failure to comply could mean a lawsuit.

As long as housing prices kept rising, the illusion that all this was good public policy could be sustained. But it didn’t take a financial whiz to recognize that a day of reckoning would come. “What does it mean when Boston banks start making many more loans to minorities?” I asked in this space in 1995. “Most likely, that they are knowingly approving risky loans in order to get the feds and the activists off their backs . . . When the coming wave of foreclosures rolls through the inner city, which of today’s self-congratulating bankers, politicians, and regulators plans to take the credit?”

Frank doesn’t. But his fingerprints are all over this fiasco. Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that “these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis.” When the White House warned of “systemic risk for our financial system” unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing.

Now that the bubble has burst and the “systemic risk” is apparent to all, Frank blithely declares: “The private sector got us into this mess.” Well, give the congressman points for gall. Wall Street and private lenders have plenty to answer for, but it was Washington and the political class that derailed this train. If Frank is looking for a culprit to blame, he can find one suspect in the nearest mirror.

Jeff Jacoby can be reached at jacoby@globe.com.
© Copyright 2008 Globe Newspaper Company.

Tags:, ,
Posted in Financial Rescue Plan?, The Economy | 1 Comment »