New Deal, Sarbanes Oxley (SOX), Homeland Security, Resolution Trust Corporation (RTC) Recidivism: Financial Regulation Stupidity Roundup

Putting the government in charge of financial accounting is like putting the streetcorner wh*re in charge of public morals.

Brace yourself for the onslaught of misguided New Deal II, Sarbanes-Oxley (SarbOx or SOX) II, Resolution Trust Corporation (RTC) II, or Homeland Security II:

• Financial Homeland Security: Treasury Secretary Henry Paulson incredibly considers the New Deal centralization to be too DEcentralized and proposes more centralized government control akin to the Homeland Security centralization that cost hundreds of billions of dollars for little or negative benefit (made things worse). The New York Times even described one aspect of Paulson's plan as a financial "SWAT team." UPDATE 4/13/08: "Federal Reserve staff move into offices of investment banks to monitor activities," The Times Online, Tom Bawden and Dearbail Jordan, 4/4/08.
• Nationalization of banks (Viva Hugo Chavez): The US federal government is researching "force majeure" hostile government takeovers of private companies and has contacted Norway and Sweden about their forced takeover tactics.
• Barack Obama (D-IL) supports centralizations similar to the Bush-Paulson plan. Obama specifically acknowledged his agreement with Bush's Paulson on increased regulation. Obama called for international regulation on a global scale, including the "Basel Committee on Banking Supervision, the International Accounting Standards Board, and the Financial Stability Forum."
• Hillary Clinton (D-NY) does not know what she is talking about when it comes to housing, economics, and finance--whether it is 3am or 3pm.
• John McCain (R-AZ) "will consider any and all proposals" for bailouts in the housing/credit crisis and seems intent on some type of regulation with only the details in question, despite the recent, misleading media surge about a laissez faire (hands-off) approach. UPDATE 4/1/08: McCain economic adviser and former Hewlett-Packard CEO Carly Fiorina confirmed that McCain opposes laissez faire and supports "appropriate reform" to empower government to pick winners and losers in the Great Housing Lottery.
• Chris Dodd (D-CT) and Barney Frank's (D-MA) Dodd-Frank bill to prevent foreclosures (which Bush might join to support) makes the usual mistakes and changes the rules in the middle of the game, creates moral hazard that increases future financial risk and cost, harms new homebuyers, and is probably another gravy-train jobs program for lawyers.
• Europe is planning to follow the United States into the inflationary abyss as the European Union (EU) Central Bank President Jean-Claude Trichet and Great Britain Bank of England Governor Mervyn King signal surrender to the US Fed's loose credit: "We're inching closer to the great global monetary easing," says Joachim Fels, co-chief economist at Morgan Stanley in London. Enjoy Bernanke's race to the bottom. Welcome to Zimbabwe.

All these grandiose schemes for New Deal II, Sarbanes-Oxley (SarbOx or SOX) II, Resolution Trust Corporation (RTC) II, or Homeland Security II are stupid and dangerous for the same reasons that all the decades of prior programs FAILED TO PREVENT THE CURRENT CRISIS (When will we learn?):

• Warren Buffet said that you make money when you buy, not when you sell. Likewise, you prevent foreclosure when you sign (or DON'T sign) the mortgage, not when you verge on default.
• The housing and credit bubbles are government policy (government intervention/activism caused the problem, with the 1990s Bill Clinton administration's pushing of subprime loans to low-income and minority borrowers by altering the anti-redlining 1977 Community Reinvestment Act, the 1990s-present Fed's easy-money monetary policy, the 2003 Office of the Comptroller of the Currency (OCC)'s use of the 1863 National Bank Act to protect and encourage risky loans by overriding and negating state "predatory lending" laws, Alan Greenspan's 2004 endorsement of "alternatives to the traditional, fixed-rate mortgage" (ARMs), Housing and Urban Development (HUD) and other federal agencies' decision by 2006 to ignore the looming, growing subprime problem, Ben Bernanke's 2007 drug-pusher tactics to keep America hooked on loose credit, Bush's "Ownership Society" policies to shoehorn subprime borrowers into home loans including the Bush/HUD/FHA/NAR "National Homeownership Month," Hillary's subprime mortgage connections, Barack Obama's ties to Fannie Mae scandals through his vice-president-(VP)-search-team advisor James A. "Jim" Johnson, the former Fannie Mae chief executive and lobbyist, etc.) so giving the government more powers is foolishly adding more foxes to the chicken coop.
• The greatest financial scandals and swindles are government-related accounting (Social Security, Medicare, Fannie Mae, Pension Benefit Guaranty Corporation (PBGC), breaking the $9 Trillion debt ceiling (legal limit) while the nation yawns) so putting the government in charge of financial accounting is like putting the streetcorner wh*re in charge of public morals.
• Paulson admits that his plan would not have prevented the current crisis and is not intended to address the current crisis, "Some may view these recommendations as a response to the circumstances of today. Yet, that is not how they are intended." Now is simply a convenient time to push an old wish-list of new government powers.
• Mental gymnastics break the back of logic when these plans try to ignore that not helping bad borrowers means not helping the worst problems while helping good borrowers means subsidizing the better-off.
• A bailout without moral hazard is impossible.
• Trying to avoid moral hazard is re-inventing the wheel: The Norwegian nationalization sacked bank staff and left shareholders with nothing, essentially letting poorly run firms first fail without moral hazard--which is exactly what the free market would do anyway without the "help" of nationalization if the government would step aside and compassionately do nothing for once, so nationalization does little more than let the government steal the assets.

Just say no.

One-year anniversary of my warning: Remember the Alamo.

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Ex-Soviet Lectures Bernanke on Free Markets

Russia has a pro-market flat tax while the United States clings to a Marxist progressive income tax.

Former Kazakhstan central bank Governor Grigori Marchenko criticized the interventionist US Federal Reserve:

Look at the last 20 years, said Marchenko, a former central bank governor of Kazakhstan, as he ticked off the bailouts in which the U.S. central bank played a role: Continental Illinois in the 1980s; the banks involved in the Latin American debt crisis; Long-Term Capital Management; the injection of liquidity after the Internet stock bubble burst in 2000.

"Those guys who have the wrong strategies get bailed out with taxpayers' money," Marchenko said, shaking his head. "It is not fair."

(International Herald Tribune, Karina Robinson, "Kazakh banker criticizes Fed's help of troubled banks," 3/28/08)

Tell Obama, Hillary, McCain, Bush, Bernanke, Paulson, Dodd, Schumer, etc. that America should be freer than the former Soviet Union:

No bailouts, mortgage-laundering, "transfers," "transitions," "assistance," "guarantees," or any other back-door euphemism to obstruct the free-market solutions.

Financial Homeland Security: Obama Tries Nationalizing Power Grab, Dodd Tries To Profit from Credit Crisis

“I hope we make money off of this.”--Senator Christopher Dodd (D-CT), Chairman of the Senate Banking Committee, speaking of the Federal Reserve's Bear Stearns bailout (National Public Radio (NPR) interview, 3/26/08)

Faustian Bargain Bailouts from Obama, Bush, and Dodd

Dodd, Obama, and Bush administration Treasury Secretary Henry Paulson all agreed to use the housing/mortgage crash and credit crisis as an excuse to expand government control over the economy:

“If an investment bank is going to start acting like a bank and get backups, then I think it begs the question, obviously, then shouldn’t there be some regulation of that, American taxpayer’s money is on the line, to what extent, how are you conducting your affairs and your business.” (Dodd)

"First, if you can borrow from the government, you should be subject to government oversight and supervision." (Obama)

On the current centralizing regulation orgy in Washington DC: "This is tectonic . . . We no longer want to have a balkanized response to a national crisis." (former SEC General Counsel Ralph Ferrara, Dewey & LeBoeuf LLP)

Financial Homeland Security: Politicians are making another power grab to control your life under the guise of compassion, protection, and "stability."

An Offer You Can't Refuse

Dodd-Bush-Obama's mafia-like "favors" require life-long subjugation worse than any mortgage loanshark. Read the fine print of government "help" to see the strings attached. Government "assistance" often takes advantage of travails to prey on the weak under the guise of compassion.

Obama's national and international centralization of financial control subjects you to more, intrusive, Big Brother "supervision" even if you DO NOT borrow but rather simply because you CAN borrow--and the government might unilaterally declare you able to borrow even if you do not want the credit line.

Obama copied his cousin Bush by claiming only to "update" or "modernize" for the "21st Century."

Dodd laughably tried to claim that government action did not cause the economic problems by saying, “No one can make a case here that this happened because of overregulation," even though Not One Cent provides numerous examples of government regulation causing the current problems.

To summarize, the government tries to run the economy, creates a disaster, blames the disaster on you, claims that the disaster proves that the government wasn't running your life enough, demands that you surrender more rights to qualify for "help," and uses your misery to increase its profit and power over you.

Given that the credit bubble was government policy in the first place, when will Financial Homeland Security's Global War on Savings declare saving to be a terrorist act?

Update 10/15/08: Bailout Mafia force companies to take bailout.

"Too Big To Fail" Financial Suicide Terrorism

The Bear Stearns bailout by the Federal Reserve with its $29 billion loan and guarantee is one more example of the "too big too fail" bluff perpetrated on us.

The spoiled sense of entitlement to other people's money is matched by Bernanke's and the Fed's gullibility or complicity in the extortion.

Reject "The System" Trick

Bernanke and the Fed talk in circles about how the Fed does not intend to bailout certain investors but it does bailout "the system" and it might bailout certain investors while bailing out the system but that does not count as a bailout of certain investors:

"It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy." (Ben S. Bernanke, "Housing, Housing Finance, and Monetary Policy," At the Federal Reserve Bank of Kansas City's Economic Symposium, Jackson Hole, Wyoming, 8/31/07)

Do not be fooled by the claim that we "have to" save any company. There was a time when that company did not exist. The company might not be able to live without us, but history already has proved that we can live without that company.

Bernanke's Fed Punishes Commodities: Burn the Bears

Bernanke Lashes the Anti-Bubble Heretics

Federal Reserve Chairman Ben Bernanke burned stock-market short-sellers with his first Wall Street bailout in August 2007 and again on March 18, 2008 with his less-than-expected 75 basis-point (75bps) Federal Funds target interest-rate cut.

The Fed temporarily pulled the rug out from under bears who had stampeded into commodities to escape equities.

The government's surreal attempts to argue that the economy is fine contrast sharply with the harsh reality of Bernanke panicking the Fed target rate down to 2.25% (negative real interest rate) and your emergency Chinese Payday Loan known as the Bush stimulus package (falsely called a "tax rebate" check).

Suppress Dissenters who Question the Overleveraged House of Cards

Bernanke is developing a habit of sniping the shorts, akin to firing into the crowd to try to keep the growing mob from storming the barricades.

Bernanke's Mortgage-Laundering: Fed Accepts Mortgage Securities

Ben Bernanke’s Federal Reserve Mortgage-Laundering Scheme Lays Groundwork for Inflationary Wall Street Bailout

The Federal Reserve again loosened its collateral requirements, this time to accept commercial real estate mortgages and mortgage securities, beginning 3/27.

• The Fed’s reckless move to accept mortgage products (when it is an unknown extent of bad mortgages that is precipitating the current global credit crunch) sets the stage for nationalizing the losses and sticking the taxpayer with the bill.


• The insidious tactic allows the Fed to take mortgages at a high, stated value and later “discover” a lower value, the difference being a loss to the Fed but free money to the firms that unloaded the toxic waste onto the Fed.


• Giving out higher value Treasuries in exchange for lower value mortgages also means that the actions would not be “sterilized” (money-supply neutral) but would be “accidentally” inflationary.


• The Fed’s decision also puts the Fed in the absurd position of entering the real estate business. As Jim Rogers quipped, soon Federal Reserve Chairman Ben Bernanke will be flying around in his helicopter to collect rents.

The Fed might as well start accepting Milton Bradley Monopoly boardgame deeds as collateral. I expect citizens to ask Bernanke and their Congressional representatives to pay cash or Treasuries in exchange for printed Monopoly deeds such as Baltic Avenue or St. Charles Place.

Federal Housing Bailout Punishes New Homebuyers

How do you make an omelet without breaking an egg?

United States Federal Government Treasury Secretary Henry Paulson and others continue to talk in circles about how their bailout is not a bailout and about how they will influence the housing market without influencing the housing market.

"The whole idea in the initiative ... is to make sure as many can be saved as possible without disrupting the market," [Office of Federal Housing Enterprise Oversight (OFHEO) Director] James Lockhart told Reuters on the sidelines of a conference in New York" (Reuters).

The other side of the coin:
Treasury, Fed, OFHEO, etc. throw new homebuyers to the wolves.

The "rescuers" (bailouters) try to obscure the fact that any bailout usually harms someone else because what is good for owners/sellers is generally bad for buyers:

• More bailouts = less inventory for sale (supply/demand) = consumers/homebuyers pay higher prices.
• More bailouts = higher "comps" (comparable prices in the neighborhood) = consumers/homebuyers pay higher prices.
• More bailouts = moral hazard = more risky borrowers enter the market to bid against you = consumers/homebuyers pay higher prices.
• More bailouts = propped-up housing bubble prices = propped-up property tax bubble = consumers/homebuyers/taxpayers pay higher prices/taxes.

Bailouts keep housing unaffordable for you or your children.

You could try to believe that the government can make an omelet without breaking an egg--although its track record is to break a dozen eggs without producing the promised omelet at all.

Please pay at the register anyway--and don't forget to leave Paulson a tip.

Federal Reserve Poole Drinks the Bailout Kool-Aid and Learns To Love the Fed Put

Fed Doublespeak:
"Fixing" (breaking) the "non-functioning" (functioning) Markets

St. Louis Federal Reserve President William Poole, previously more of an inflation hawk in the Fed, has flipped into a bailout apologist with his whitewash paper today, "Market Bailouts and the Fed Put" (11/30/07).

Calculated Risk commenters did a good job of exposing the flaws in Poole's whitewash.

The root absurdity of the Fed's claim that its interventions are fixing a non-functioning credit market is (like most allegations of market failure) most easily illustrated by an eBay auction:

• Seller lists item.
• No one bids.
• Auction ends without a sale.

This is an example of a working market, not a broken market.

Sometimes the correct action is no sale.

Functioning free markets do not guarantee churning commissions.

Functioning free markets do not guarantee any particular level of trading activity.

The markets were working fine in August 2007 by spiking the overnight inter-bank lending rate to 6% in response to the latest information of overlooked risk in overpriced housing assets/securities.

Of course, a price-fixing (interest-rate setting) central bank is anathema to a free market, so Fed hostility to a properly functioning free market is unsurprising.

SEC NRSRO Causes Asset Mispricing?

When is the government not the answer?

When it caused the problem in the first place.

Bailouts are bad for the same reason that other government interventions are frequently bad, because the quick cry for government regulation often overlooks the embarrassing fact that, not only did a financial disaster occur under the government's watch, but government regulation actually caused or worsened the financial disaster.

The global credit crisis resulted from the subprime mortgage mess partly because the big ratings agencies mis-priced the financial assets and risk:

"But when it comes to using ratings, many large investors' hands are tied. Pension funds, banks and insurance companies can only buy debt that's been rated by a Nationally Recognized Statistical Rating Organization. NRSRO for short. The Securities and Exchange Commission awards that seal of approval. Until just a few years ago, the only NRSROs were, you guessed it, Standard and Poor's, Moody's and Fitch. Joseph Mason teaches finance at Drexel University" (Marketplace radio program).

Those big 3 SEC favorites retained an implicit government-approved authority which they used to rubber-stamp the housing bubble's gross overpriced mis-valuations of homes and mortgage-backed securities (MBS).

Meanwhile, the rating company Egan-Jones has been trying unsuccessfully to get the NRSRO certification but the SEC has shut-out Egan-Jones for 10 years while various accounting and financial scandals occurred under the SEC's watch:

[Sean Egan stated:] "With Enron and Worldcom we were often times the lone voice raising these concerns."

US Federal government financial regulations discouraged consumers/shareholders from using accurate information.

The government's hand in creating the global asset bubble and credit crisis does not instill any confidence that any of its bailout plans will make economic conditions better. The bailouts might make the economic situation worse.

Did Government Create Mortgage Securities Mess? Is It about To Repeat Its Mistake?

Another Deja Vu Nightmare from Schumer, HUD, and the rest of the Federal Government

Who cares about the Hollywood writer's strike when we have the daily farce of government bailout policy?

The US federal Housing and Urban Development (HUD) website boasts that it was the federal government which invented and pushed mortgage securities, a tool that some analysts and pundits now accuse of causing/enabling the housing bubble crash, subprime mortgage mess, foreclosures epidemic, institutional financial losses, teetering stock market, and global credit crisis:

"[HUD's] Ginnie Mae is a wholly owned government corporation within the U.S. Department of Housing and Urban Development. Ginnie Mae pioneered the mortgage-backed security (MBS), issuing the very first security in 1970. An MBS enables a mortgage lender to aggregate and sell mortgage loans as a security to investors. Ginnie Mae securities carry the full faith and credit guaranty of the United States government, which means that, even in difficult times, an investment in Ginnie Mae is one of the safest an investor can make" (HUD).

The "safety" means that you the US taxpayer are liable for all the risk, so you can pay a debt-defaulter's mortgage to make sure that a Wall Streeter does not lose money. That guarantee is quite a blessing if you spend your days trying to figure out ways to pay other people's mortgages and spend your nights worrying about Wall Streeters losing money.

Take a moment to absorb the irony of all the politicians now decrying mortgage securities when politicians created and pushed mortgage securities.

Senator Charles E. "Chuck" Schumer (D-NY) complained to the Federal Reserve, Treasury, HUD, FDIC, SEC, and others:

"Over the past several decades, innovations in the mortgage markets have made it much more difficult for too many homeowners to refinance their loans when they need to. Furthermore, the prevalence of unscrupulous lending fueled by the increased appetite for subprime mortgage securitizations has resulted in a growing number of homeowners facing payment shocks as rates reset that could cause them to lose their homes. In order for them to keep their homes, their loans must be modified. Twenty years ago, most of these borrowers could go to the bank that held their mortgage and seek assistance. Today, with their loans sliced and diced into many pieces held by a variety of unaffiliated market participants, there is no one on the scene to help beleaguered homeowners do loan workouts" (Schumer press release, 8/22/07).

Schumer's new "solution" is to put the same fox in charge of the same henhouse again (Schumer's press release then referred to him in the third person):

"Schumer has supported the empowering of non-profit agencies, sanctioned by the Department of Housing and Urban Development, to play this role of facilitator" (Schumer press release, 8/22/07).

Schumer concluded his solution with a call for more, untested, government tinkering in the housing markets:

"The reality of today’s mortgage market calls for new and creative thinking by the regulators" (Schumer press release, 8/22/07).

HUD's response to the flood of bad mortgage securities is to announce its creation of yet another mortgage security:

"The new security will be a multiple-issuer pool type under the Ginnie Mae II Mortgage-Backed Securities Program, and will be available for pool issuances beginning December 1, 2007" (HUD 10/16/07 press release).

So the timeline is:

• Government decides it must invent new creative financing for housing.
• Government creates Mortgage Backed Securities (MBS) to divide/resell the debt/risk.
• Government accuses Mortgage Backed Securities (MBS) divided/resold debt/risk of causing housing disaster.
• Government decides it must invent new creative financing for housing.
• Government creates new Mortgage Backed Securities (MBS) to divide/resell the debt/risk.

You can't make this stuff up.