Friday, October 03, 2008

There are TWO ways the U.S. government has destroyed the financial system

The email below from someone in the system (Steve Goodman of Voorhees, NJ) explains all. Not only did the government cause the problem with its insistence on lending money to anybody capable of staggering into a bank but it is now preventing any recovery of the system with its "mark to market" regulation. The essential point is that most sub-prime borrowers are in fact making their payments but the regulations not only ignore that but force the financial system to treat the mortgages concerned as worthless

I am an attorney and have spent most of my career advising banks and other lenders on compliance with the many laws and regulations that govern loans to consumers and businesses.

I think that the culprit behind this mess is fast coming to light. It is our government. In part the crisis is a runaway subprime loan giveaway foisted on regulated lenders by the government. Banks and other mortgage lenders were required by federal law to make and invest in mortgages made to persons who could not afford to borrow, or they would be in violation of the federal 1977 Community Reinvestment Act (CRA). Over the years, consumer activist groups, such as ACORN (but there are others), used the CRA to interject themselves in the regulatory process regarding requests by banks to open new branches or to merge with other institutions. Initially, the Federal Reserve Board gave little weight to these activist claims but, as the Congress criticized the Fed to enforce the CRA (and thereby to STOP discrimination in home lending, of which there was little or no evidence), banks were forced to enter into contracts with ACORN and other activist groups under which they committed to make billions of dollars of subprime loans.

The CRA was used more recently as a cudgel to force banks to make loans the banks would not make on their own. How could a bank refuse to make a loan if it would be approved by applying the very low approval standards adopted by the gse's (Fannie and Freddie)? And, under Andrew Cuomo, the Chairman of HUD in the 90's, the then "normal" rules for rejecting loans were replaced by very lax standards intended to rapidly increase home ownership by those persons who could not afford to buy homes under the old rules. HUD permitted the charging of broker's fees, ALT-A loans, interest only, and whatever the market would bear. It created the subprime market we know today and induced lenders to participate. States and localities are adopting laws and ordnances to regulate the practices of mortgage lenders and brokers, with no real understanding of how the market got to this point.

The majority of CRA (subprime) loans are now performing. But, that fact seems to have no impact on their "market" value, at least to regulators, auditors and accountants. The market for subprime loans has quickly dried up because the "mark to market" rule adopted by the Financial Accounting Standards Board requires that all assets be valued and revalued based on their current market worth. If the secondary market for any financial product (such as a loan) tends to dry up, the mark to market rule comes into play to further devalue those products traded in that market. Thus, fairly quickly, an otherwise performing subprime loan secured by residential real estate collateral has a near zero market value. Even if a buyer wanted to purchase the subprime mortgage for what the buyer deemed its worth based on the performing stream of payments. interest rate, and the like, the buyer would be required to immediately mark the asset value down on its books and undermine its own stock market value.

So, if a buyer purchased a mortgage that, based on the likelihood of payment, remaining payments, interest rate, and credit worthiness of the borrower it valued at $100,000, it would then have to apply the mark to market rule to value the loan at near zero on its books. No publicly traded or regulated company or bank can do that. Moreover, in my experience, the bank regulators will soon demand that other loans, such as prime mortgage loans, car loans, installment loans, and the like, be written down as their marketability will come into question. The regulators can themselves bring a loan market to a standstill. They did it before and will do it again.

Thus, the net effect of the mark to market accounting rule is to create a downward spiral in valuation of all loans, without regard to their true worth. And, while the mark to market rule was supposed to create a better understanding of a company's (or bank's) value, which the cost basis somehow did not do (although it worked for a long, long time and there was no perceived need to change it), it has quickly been found to artificially undermine that net worth.

So, instead of throwing $700 Billion into a black hole, to be doled out at the discretion of some bureaucrat who will have no idea what he or she is doing, and thereby prolonging instability in the market and inviting a depression, we should simply rescind the mark to market rule and let buyers and sellers reach the price for loans that would allow them to value loans in the real world and use that cost or historical value for bookkeeping purposes. To do so will keep bank regulators, accountants and auditors at bay and open the market to market trading.

(It would be a positive on public confidence in the banking system to raise the cap on deposit insurance, too but, in my opinion, that is not as essential as rescinding the mark to market rule.)

Note that by requiring the use of the mark to market rule, the government that required that subprime loans be made, is now requiring that they be written down to near zero values that Secretary is advising the Congress are much less than their real worth. After all, his argument in selling his plan to the Congress is that the government can hold the loans for a short while and then sell them into the market for large profits. But, unless and until the mark to market rule is rescinded, The government will be able to sell subprime loans only to nonpublicly traded companies. So, to unload these loans for the promised profits, the mark to market rule will rescinded when it is in the interests of our government to do so.

In essence, the U. S. Government has required banks and other mortgage lenders to make imprudent subprime loans and, under Paulson's plan, gets to steal them and later sell them for a profit. This is not a bailout. It is highway robbery. And, we are now getting to see the Paulson plan for what it is. This is a very incompetent man who rose far above his capabilities.


On Jews and the Left and the Book of Job

A couple of days ago I wrote "A small meditation for the Jewish New Year", in which I commented on a possible lesson to be learnt from the book of Job. I expected that I might hear from one or two of my Jewish readers about it and I am pleased to say that I have. Because of my strange combination of utter atheism and great respect for Judeo-Christian religion, I get a fair bit of correspondence from religious people and I appreciate it all. I reproduce below an email from a religious Jewish reader that comments further on the issues I raised earlier:

The book of Job is a profound book; we read it on Tisha B'av, the commemoration of the destrruction of the Temples in Jerusalem. The main thrust of it is that one has to have faith, ultimately, that God has reasons for what he does. While God does "attack" Job, He later gives back everything, but the story really speaks to the problem of theodicy, trying to explain the existence of evil in a world we believe is run by a benevolent God. Of course, there ARE no answers that make sense, and one either takes it on faith that it is so, or goes the way of atheism. And I am not condemning the latter at all!

But I began being a religious Jew in part because I loved the "non-answer" of Job, that there ARE no real answers. Job's friends try to make sense of what is going on, but they can't persuade Job, and that is because, philosophically and superficially, there ARE no answers that make sense. I fell in love with my own religion because it recognized that, even as the rest of the time, it acts as if it does know the answer.

Same thing in that on the day of a funeral for a close relative, there are certain prayers and things not done by the mourner. Why? Because Judaism realized it is impossible to fully accept the idea of a god or benevolent deity in the face of grief. And the rest of it may seem pretty crazy, the stuff we do (and I can step into an outsider's shoes and understand that!), and as always, this is not an attempt to persuade towards Judaism...we don't do that...but I loved these couple of things that I wrote about above.

As to Jews and evangelical Christians...I AGREE WITH YOU 100%. During the intafada, the only ones who supported Israel were Orthodox Jews and evangelical Christians. The lack of brains on the part of Jews concerning this, as well as them voting Democratic, has nothing to do with anything from Heaven! More like some suicidally stupid something from Hell.

Part of the problem is that the Nazis were labeled as "right wing", which is a perversion of what they really were. But I didn't learn or understand that until a number of years ago either. And to this day, nationlistic movements, especially in Europe, SOME (and some mistakenly) are labeled anti-Semitic AND are termed "right wing". In my father's time, in Europe, prior to the Holocaust, the anti-Semites were the Hungarian and Romanian "right-wing" nationalistic groups that allied with the Nazis, and many Jews still equate the terms.

It's wrong, but it's almost an educational problem, plus a blind spot on even the idea of learning anything new. It's the same thing of Jews voting Democratic. They still refuse to accept that FDR was an anti-Semite, or at least no friend of ours...that all the totems of the early Left that were supported by Jews were WRONGLY supported by Jews...but we have this weak spot in our hearts..and brains..that buys into the same crap, excuse the expression, that the Left is always the side of good intentions and caring about the "forgotten man"..but as has been pointed out, the very idea of that phrase was PERVERTED by FDR for political use, just as the very word "liberal" came to be coopted into something it wasn't meant to be.

Does this mean I give my fellow Jews a pass? NOPE. I am livid that we don't learn the truth, that we can't even bother to look into it (though I go to a small congregation where 90% will vote for McCain/Palin and the Republicans!). It's not just Abe Foxman, either. He's but one of many.

Finally, the other problem is that the biggest proportion of Jews in the United States are anti-religious, not just not religious. They are more concerned about "gay" and "abortion" rights than protecting Israel (or themselves, in my opinion, since they don't see the damage this does to our own people). It makes me sick, truthfully, but there it is. The irony is that most Jews are afraid of the Christian Right because of those kinds of issues, but will also say "but they are trying to convert us!". It's true, but so the hell what?! 75% of the Jewish religious Left intermarries out and loses connection to Judaism anyway, plenty getting married in churches. So what are they really worried about?

Religious Jews vote increasingly for Republicans, and though we tend to not like conversion efforts directed our way, realize we have commonalities with the Christian Right. We can still be friends...maybe not the closest, but we can certainly be allies to a point, because we absolutely believe in Israel and even many social issues.


Desperate dissing of Palin

A dispatch by Jason Szep of Reuters carries the headline "Palin's Troubles Mount for McCain in White House." What are these "troubles"? Here's the list:

An editor at Newsweek wrote a column saying that Palin is "unqualified."

Palin's interviews with CBS, Fox News and ABC "raise questions over her nomination and dealings with the media."

Palin faces "a stubborn investigation into charges that as governor she abused her power by firing a public safety commissioner."

A conservative columnist "called on Palin to step down ."

Palin has been mocked on "Saturday Night Live" and "Late Show With David Letterman."

A "conservative New York Times columnist . . . called her candidacy 'embarrassing.' "

Mitt Romney "questioned the campaign's strategy of restricting Palin's media exposure."

Except for the "stubborn investigation," all of these "troubles" are troubles with the media. One wonders why Szep did not include his own article in the list.



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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


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