Archive for September, 2008

Fascism comes to Washington

Monday, September 29th, 2008

UPDATE: The bailout bill failed in the House with 133 Republicans and 95 Democrats voting NO.

Larry Kudlow believes the next version to be voted on will be worse. Will the Democrats pass a hard left bill ?

More evidence that the free press is a myth. Too bad. At least I’m 70 years old.

This bailout bill is very worrying. In the 1920s, Weimar Germany made two fatal decisions. One was to rearm with the assistance of the new Soviet Union. Germany was barred from having an Army General Staff, the innovation that had made the Prussian Army almost invincible. They were also severely limited in the size and composition of the German Army. The Soviets allowed German Army facilities and armament plants on their territory.

The second decision was to deal with the onerous provisions of the Treaty of Versailles, with respect to war reparations, by starting an inflation that quickly became hyperinflation. The result was a collapse of middle class confidence. The present housing crisis and the collapse of the financial services industry, due to political manipulation of rules on lending, has had a similar effect on the US middle class. They don’t realize it yet but this new legislation is the first step to fascism. Government, principally the Democratic party and its presidential nominee, is now empowered to choose winners and losers in the financial sector. These people already vote overwhelmingly for Democrats and contribute to Democrats. They have sent money to both sides but the people who created this crisis with CRA got the vast majority.

What does the future look like ? The Wall Street Journal seems optimistic, but I’m not.

We’re also told the government ownership provisions in the bill are narrow enough not to ruin the securities auctions. The government will get warrants to benefit from any market upside in return for buying the securities, and this will probably be reflected in the price the feds pay for the debt. Our Treasury sources say the warrant provision is de minimis enough that it shouldn’t interfere with price discovery, which is one of the major goals of this exercise.

We now have a situation very similar to corporate capitalism but we are about to have a government with veto-proof majorities and a like-minded president that does not believe in capitalism. That is how fascism comes to power. Obama is already threatening prosecution for “misleading” anti-Obama ads. There is some controversy about who is issuing threats but I just saw a Missouri prosecutor threaten those who “mislead” voters with ads. He was on TV and identified as a prosecutor. Sounds like fascism to me.

The deal

Sunday, September 28th, 2008

UPDATE: This comparison looks better but the bill isn’t signed yet.

JP Morgan did a much better job with the Panic of 1907, a financial panic resulting from the San Francisco earthquake and immense insurance losses. I reviewed a book on this topic last spring.

The negotiations in Washington seem to have resulted in a deal. The resulting legislation is being drafted and will be posted on the internet at noon today. That will be the only positive development, in my opinion. The cause of this crisis has been described here in other posts. The essence of the solution, and the reason why I am pessimistic about it, is that the solution has been drafted by the same people who caused the crisis. Barney Frank and Chris Dodd are the parents of the monstrosities that Fannie Mae and Freddie Mac have become. The disastrous expansion of subprime mortgages has poisoned the credit markets of the world.

The story of John McCain’s suspension of his campaign has still not been very well explained. The Democrats have majorities in both houses of Congress. They did not need Republican votes for the original Paulson package if they were able to keep all their own people in line. What happened was that the House Republicans were not going to vote for the bill and Pelosi had stated that she would not bring the bill to the floor unless she was assured of 110 yes votes by Republicans.

When McCain announced he was returning to Washington, the Democrats quickly announced that they had arrived at a solution and his action was unnecessary. What they did not say was that they did not have the Republican votes that Pelosi said she needed.

“You were being asked to choose between financial meltdown on the one hand and taxpayer bankruptcy and the road to socialism on the other and you were told do it in 24 hours,” Representative Jeb Hensarling of Texas, head of the conservative group, said. “It was just never going to happen.”

If they were willing to pass the bill without Republicans, they were correct. They had a deal. The problem was that it was a deal between the Bush Administration and the Democrats. However, Pelosi was still determined to have Republican votes as cover for the huge groundswell of anger directed at the Congress and Wall Street over the crisis. What McCain did was sit down with the House Republicans and make sure they were included in the negotiations. The Democrats poisoned the bill with ludicrous provisions to fund radical socialist groups like ACORN, which has had many members convicted of vote fraud and which has been involved in expanding the toxic mortgages that are at the root of the problem. The worst provision was this:

DEPOSITS. Not less than 20 percent of any profit realized on the sale of each troubled asset purchased under this Act shall be deposited as provided in paragraph (2).

USE OF DEPOSITS. Of the amount referred to in paragraph (1) 65 percent shall be deposited into the Housing Trust Fund established under section 1338 of the Federal Housing Enterprises Regulatory Reform Act of 1992 (12 U.S.C. 4568); and 35 percent shall be deposited into the Capital Magnet Fund established under section 1339 of that Act (12 U.S.C. 4569).

REMAINDER DEPOSITED IN THE TREASURY. All amounts remaining after payments under paragraph (1) shall be paid into the General Fund of the Treasury for reduction of the public debt.

That means that ANY transaction that realizes a profit, regardless of profits, or losses, on the overall bailout program, will deposit 20% of that profit in a fund which goes to ACORN and similar organizations. These “community organizer” groups are at the root of the problem. They are Democrat activist groups and affiliated with the far left of the party, like Obama, who once worked for them.

A current comparison of provisions is linked here. It is a Word file. At present, the Republican leadership is circulating this list of provisions to correct a few concerns. However, not everybody is satisfied. A House aide sends this warning:

1) This is, essentially, the same bill. Total deal is $700b, which Paulson or next Treasury Secretary can spend the first $250b even if he believes unnecessary. He/She can spend second $450b if thought necessary. A new bill isn’t passed with veto proof majorities to repeal it. This is substantively identical to the original Paulson plan. Congress always had the power to repeal some or all of the authority if it has veto proof majorities.

2) As for Acorn and bankruptcy, they were never in the bill. Dodd/Frank tried to push those in mid/week, they weren’t in the plan already rejected by conservatives on Monday. Even Obama conceded that those provisions would come out. They were simply a red herring, used for extra bargaining power by the left.

3) Lipstick has been put on the pig, and perhaps some Members will be fooled by it, but their constituents will not. I think some political careers will be ended over this.

When I ask this aide if there is anything to be happy about, this aide replies:

Unclear. Still confusion over whether the “insurance” is a fig leaf (secretary’s choice to use – in which case, he wouldn’t) or substantive (mandatory).

We will see how this turns out but I am very pessimistic this morning.

How we got here

Friday, September 26th, 2008

If that doesn’t explain it, try this:

Interesting, eh ?

Even the New York Times predicted this crisis although that was in 1999.

What do we do now ?

Wednesday, September 24th, 2008

UPDATE: I watched Bush’s speech and Gingrich afterword on Hannity’s show. I still have doubts that this bill will pass in present form. I hope that McCain, who is the only one with credibility on this topic, will rewrite the bill along the lines I have indicated here. Dodd, the banking chair, and Obama are the two biggest recipients of money from Fannie and Freddie. That story is here by the man who might be the McCain Secretary of the Treasury.

UPDATE #2 Here is someone who really doesn’t like the bailout. I don’t know that I’m there but he knows more than I do. Sarah Palin gave an interview to Katie Couric today and got asked some pretty tendentious questions. Especially about “mortgage amnesty” and that is a terrible idea. Here is more about the bad ideas of Senator Durbin.

UPDATE #3 Here is still another idea. Why are we not seeing more about this ?

John McCain has announced that he is suspending his campaign to work on the financial crisis with Congress. So far, we have a $700 billion proposal to bail out the holders of junk securities. The Wall Street Journal, which has been warning about the Fannie Mae problem for years, says we have no choice and have to bail out the system.

The reality is that last week we had a global panic that included a flight from even basic financial assets like money-market funds and commercial paper. This was not Hank Paulson’s invention. Panics are real events. If allowed to become crashes, they can have terrible economic consequences. We were lucky to forestall a crash last week, but the underlying sickness has to be addressed to avoid a recession, perhaps even a deep one.

Senator Jim De Mint, one of the spending hawks in the Congress says “I believe it is completely unacceptable”. There is other opposition from Republicans who are concerned that Congress caused the problem and is unlikely to get the fix right. There are even those who doubt there is a crisis at all.

Donald Luskin is worried about getting it right.

First: There’s simply no objective way to know whether the banking system is as close to disaster as top officials at the Treasury and Federal Reserve claim. They themselves don’t really know. This is a “banking crisis,” they say. But then again, other politicians claim there is a “health care crisis,” an “immigration crisis,” an “energy crisis,” and so on.

Senator DeMint says the last time he was presented with a deal that had to decided immediately, he was on a used car lot. Can we believe that this is as bad as it is portrayed ?

Next: Of the $1.26 trillion in non-prime mortgages — that is, “sub-prime” and “Alt-A” mortgages — $743 billion is already either owned or guaranteed by Fannie Mae and Freddie Mac, companies that were shored up by a government rescue earlier this month. That leaves $521 billion, which means the Treasury’s $700 billion would be more than enough to buy them all. And that’s even if the Treasury paid full value. In fact, the Treasury will get a steep discount, considering that many of the mortgages in question are in delinquency or default. Does the Treasury really have to buy every single non-prime mortgage — even the healthy ones — twice over?

Who is going to be setting the price of these distressed instruments ?

Third: The officials advocating this — Henry Paulson and Ben Bernanke — are the same ones who, in similar haste, engineered interventions this year in the collapses of Bear Stearns, Fannie Mae, Freddie Mac, and American International Group. With each intervention the banking crisis has gotten progressively more severe. Experts differ on this, but it is my professional judgment that these interventions actually made matters worse, because of the unintended consequences that were nearly impossible to forecast at the moment of decision. We simply cannot know what unintended consequences might be unleashed in the process of a massive acquisition of mortgage assets by the federal government.

This has been a slow motion car wreck. Who is to say this will end it ?

The present proposal is primarily about the government acquisition of unwanted assets from solvent banks. The RTC acquired its assets automatically when thousands of banks and thrifts became insolvent and fell under receivership by the FDIC and the Federal Savings and Loan Insurance Corporation. There were no troubling ethical questions about which assets would be acquired, from whom, in what priority order, and, most critically, at what price. All the RTC had to worry about was eventually selling the assets it already had.

This is a serious concern and must be solved. Holman Jenkins has his doubts.

Treasury’s plan is to enter the market at a higher level, buying the depressed mortgage securities supported by these houses. In brief and eye-opening remarks in the Senate yesterday, Ben Bernanke spun a scenario in which derivative mortgage debt would be boosted in market value closer to the value of the underlying cash flow, restoring the banking system to solvency. Then why not just let banks value them that way on their books now, so they aren’t teetering on insolvency? Wait for it. We’ll get there, but not now apparently.

Nor does the Paulson plan have the Occamite virtue of cutting to the heart of the problem, the housing market. So many mortgage cash flows have been sliced and diced and spread over different kinds of securities owned by holders all over the world — a big stumbling block to the private sector trying to manage its way out of a hole. It’s not clear the new agency offers a solution to this problem. It would probably have to buy the entire outstanding stock of questionable mortgage debt before it would have any hope at getting at the underlying collateral, i.e., houses. But then it would become the world’s biggest, most troubled landlord and biggest forecloser on homes. Politics would intervene — and any potential taxpayer gains would likely be frittered away to keep nonpayers in houses they can’t afford.

Jenkins has a suggestion:

Here it is: [One] Let the government be a buyer of last resort for mortgage derivatives for a set price (say, 25 cents on the dollar), hoping others will gain confidence to step in. Hope, too, that this whets the appetite again for investors to recapitalize hurting banks. If banks continue to falter even with the option to dump their mortgages on government for a deep discount, deal with those challenges as they occur, with forbearance where possible. Meanwhile, [Two] use taxpayer dollars to clean up the housing mess in the Southwest and Florida — the surprisingly confined source of all our troubles.

Every time we mention demolishing houses, somebody slaps us over the head with Bastiat — the French economist who’d say you don’t increase wealth, you reduce it, by destroying some houses to make the value of others go up.

True — but we’re in a situation today where responsible homeowners will pay one way or another for the acts of irresponsible lenders and buyers. The cheapest bailout would be one that weeds out enough surplus housing to stop the free fall in a handful of overbuilt markets, whose foreclosure epidemic is dragging down the entire securitized mortgage market. We’re talking about buying thousands of houses, not millions of mortgages. And yet the resulting higher mortgage debt prices automatically would help to recapitalize the banks, while (knock wood) leaving some Paulson powder dry for future contingencies.

Deroy Murdock has another interesting suggestion:

First, declare that Fannie and Freddie are dead. Make this painfully clear to everyone by using crowbars to pry the brass nameplates off of their respective headquarters buildings.

Second, pour their assets into a new, temporary agency whose legal authority expires within 90 days. The Asset Breakup Corporation will supervise Fannie and Freddie’s orderly dismemberment and sale in much smaller pieces.

Third, use Fannie’s and Freddie’s databases to create a list of their customers ranked alphabetically according to the individual homeowners’ surnames.

The first set will contain people whose surnames begin with the letter “A.” Americans named Aaronson, Adams, Alvarado, and Antonucci. The second will consist of those whose surnames begin with “B.” People named Baca, Benson, Berkowitz, and Brooks will compose this category. Next, people surnamed Caruso, Charles, Chavez, and Chung will populate the “C” group.

This simple method soon would divide Fannie’s and Freddie’s assets easily, fairly, and transparently into 26 distinct slices.

Then, sell them off. I’m sure we will see plenty of suggestions over the next few days but I don’t think the present Paulson Plan is going to be adopted. At least, it won’t be adopted in this form.

A primer on the mortgage crisis

Thursday, September 18th, 2008

I am no finance expert, but I was explaining to my wife how this mortgage meltdown occurred and I thought a few others might be interested. I bought my first home in 1969. It was in South Pasadena and I paid $35,000 for it, with a $3500 down payment and a $3500 second trust deed taken back by the seller who had already moved into a new home and was motivated. Thus, I paid 20% down and Home Savings and Loan took the mortgage at 6% interest. For the next four years, I paid $204 per month on my mortgage and $35 per month to the second trust deed holder until I paid the second off two years later. In those days, Savings and Loan institutions, like the one in “It’s a Wonderful Life,” took in deposits at 4% interest paid and loaned money at 6% to home buyers. They kept their own loans in-house and collected the payments as their income. Like the S&L in the movie, they had borrowed “short” and loaned “long” so they were susceptible to runs.

The Savings and Loan debacle of the 1980s ended that era. A summary by someone who knows a lot more about this than I do is here. That, however, does not explain the mortgage mess.

The S&Ls were destroyed by inflation in the 1970s and 80s. By 1979, interest rates on houses were as high as 21% and savers had abandoned the S&Ls to invest in trust deeds (as I did) or in high interest bonds. I had US Treasury bonds that carried a coupon rate of 16% and, when bought at a discount, carried an interest rate of 18%. That was US Treasury paper ! The S&Ls depositors fled to higher yields and the action by Congress in freeing the interest rates they could pay was too late. Worse, it raised the total deposit cap that was insured by the Federal Savings and Loan Insurance Corporation, or FSLIC, to $100,000 from $20,000. There was no reason to do that and it was not debated. It was just added by the House Banking Committee chairman, Fernand St Germain. The result was the savings and loan scandal of the 1980s. After that, a new model was necessary for home loans. It was not an improvement.

As I explained the current mortgage process this morning, I tried to use simple examples for clarity. In my example of the 1969 purchase of my first home, the mortgage company serviced the loan, collecting my payments. It was in their interest to verify my creditworthiness as, if I defaulted, they would have to foreclose and take possession of my house. In the 1960s, houses kept their value but, in 1973 when I sold that house after moving to Orange County, I sold it for what I had paid. There was no appreciation. Considering that I had made improvements, I lost money. Why I didn’t keep it and rent it to someone else is another story? I should have but I was starting a new medical practice and didn’t want to manage a rental property 60 miles away. That was a bad decision as it was sold for $595,000 15 years later.

When I bought my house in 1991, the one I still own, the loan was handled by a mortgage broker. This was an innovation since 1969 and was at the root of the present crisis. Loans were no longer carried by the origination lender but were quickly sold to other investors. The broker made his money from the origination fees and the “points” paid by the borrower. This was just as true of banks, like Washington Mutual, as brokers. I refinanced my house a couple of years ago and made payments to WaMu for about six months. Then I received a notice that the loan was now owned by Wells Fargo. This resale market for mortgages had one bad feature and one good one. The bad feature was that the originating lender did not have to live with the decision to loan me money forever. Once they sold the loan, the problems that arose in the future, if any, were not their problems.

The good feature, and the bad, were a result of the Federal National Mortgage Association, Fannie Mae, and its sister organization, Federal Home Loan Mortgage Corporation, Freddie Mac, which buy residential mortgages from banks and brokers. They have criteria for those loans, and those that meet them are called “conforming.” Because Fannie Mae and Freddie Mac have been perceived as guaranteed by the government, the interest rates were lower for conforming loans.

The resulting mess is a consequence of moral hazard. The classic example of moral hazard is in insurance where the existence of insurance may cause the insured to behave in a less careful manner. That is exactly what happened here. If the lender was loaning his own, or his company’s, money, he had an awareness of the risk of default and an interest in minimizing that risk. The result was good judgment in lending. Once that risk was reduced or removed, by selling the mortgage to someone else, it became the problem of the buyer to assess risk. Fannie Mae and Freddie Mac were responsible for the risk in the loans they bought.

Then another factor entered the equation, the Congressional mandate. Congress, and especially the Democratic party, decided that lending standards were too restrictive toward minorities and the poor.

The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation’s banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.

That was the lead paragraph from the article, in 2000. This was all predictable. Moral hazard plus Congressional mandates. If I were a Democrat, I might say that the Congress was in Republican hands from 2000 to 2006. Very true. There is blame enough for both parties. Real estate developers and construction interests loved the new rules. They tend to be Republican. There were a few who tried to stem the tide.

From David Frum today:

By JOHN D. MCKINNON The Wall Street Journal; July 12, 2008; Page A8

WASHINGTON — Peter Wallison saw Fannie Mae’s troubles coming 25 years ago.

In the early 1980s, he was a top official in the Reagan Treasury Department. And Fannie Mae, at least by some measures, was insolvent, thanks to the economic storms that were then roaring through the savings-and-loan industry.

But getting anyone to do anything about the congressionally chartered mortgage company and its unusual vulnerabilities proved futile, even after Mr. Wallison began writing books warning that it and sister company Freddie Mac could take advantage of their government ties and relative lack of regulation to grow too large.

Fannie and Freddie applied pressure to try to silence Peter.

Almost immediately, he said, he experienced political pressure of the sort that—until now—has made Fannie Mae largely invulnerable to new legislative oversight and left it under the supervision of a weak financial regulator.

At the time, he sat on the board of a mortgage-insurance company that did extensive business with Fannie Mae. When the company’s officials noticed that they weren’t being chosen to insure some mortgage pools, Fannie officials told them it was because of Mr. Wallison’s new project at AEI, he said.

John McCain tried pass legislation.

For a decade reformers have tried to persuade Congress that they were allowing a serious risk to the government’s credit to develop in Fannie Mae and Freddie Mac, but few lawmakers would take action.

One of the reasons for this was the extraordinary power of Fannie and Freddie. They not only spent close to $150 million in lobbying over the last decade, but they also got their constituents—the securities industry, the homebuilders and the realtors—all powerful industries that depend on Fannie and Freddie’s largesse—to support their sole legislative objective: the defeat of any attempt to control their growth. Congress, as usual knuckled under to the special interest.

However, a very small number of lawmakers saw this problem for what it was, and were willing to stand up to the power of Fannie and Freddie—and I am proud to say that John McCain was one of them. In 2005, he joined a small group of Republican Senators to cosponsor the Federal Housing Enterprise Regulatory Reform Act, the strongest legislation introduced up to that time to control Fannie and Freddie. In a statement, he noted that “For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac…and the sheer magnitude of these companies and the role they play in the housing market…If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie and Freddie pose to the housing market, the overall financial system, and the economy as a whole.”

These were prophetic words, given what we know now, but they did not spring from a sudden conversion in that year. Three years earlier, McCain had introduced legislation—co-sponsored with the House Democratic leader Dick Gephardt—to create a Corporate Subsidy Reform Commission. The purpose of this group was to eliminate what McCain called “corporate welfare.” In a statement at the time, he noted that “There are more than 100 corporate subsidy programs in the federal budget today, requiring the federal government to spend approximately $65 billion a year…These programs provide special benefits or advantages to specific companies or industries at the expense of hard-working taxpayers. In years past, Congress has insisted that it would eliminate the existence of this corporate welfare, but virtually no such program has been eliminated…This bill aims to remove the special treatment given to politically powerful industries…”

In other words, as far back as 2002, John McCain realized that underlying what would ultimately become the Fannie and Freddie crisis was the willingness of Congress to provide financial support to private corporations. And he was willing to take on powerful interests to stop this process. If his bill had resulted in action at that time, the unprecedented steps that the Secretary of the Treasury and Congress had to take in the last two weeks would not have been necessary.

What do we do now ? The leaders of the financial world don’t know what to do. Harry Reid says no legislation is planned because they don’t know what to do.

I guess we will just have to elect McCain.

As usual, Herr Olbermann is wrong in his comments about one of McCain’s suggestions about how to deal with the crisis.

UPDATE: This comment from another blog on the subject of the AIG collapse is interesting. It ties the thread from Fannie Mae to all the other turmoil.

Question: What started this mess?

Answer: The housing “bubble” burst.

Question: How did that cause this problem?

Answer: Most mortgages are bundled and sold as fixed income securities (bonds). Once default rates went through the roof and housing values fell, the value of these bonds could not be determined.

Question: Why is that a problem?

Answer: When the value of a bond is unknown, no one wants to buy it.

Question: Why is that a problem?

Answer: Because a bond that you can’t get a bid on is pretty much worthless as an asset.

Question: And why is that a problem?

Answer: Because most financial firms are required to “mark to market” what they own. And a security that you can’t get other people to buy is valued at zero.

Question: Can’t you take an educated guess?

Answer: That’s what most firms are doing, but a guess is just a guess, not anything more precise. And if you are dealing with a firm that could be worth billions or could be billions in the hole, would you give them a loan? No. I didn’t think so. Ergo, there goes Lehman Brothers and Bear Stearns.

Question: And who began this mess?

Answer: Who are the world’s biggest bundlers and sellers of mortgage backed securities? Fannie Mae and Freddie Mac. They set the standards for mortgages. They relaxed lending standards to help the “poor” obtain home ownership. They hired lobbyists and gave millions to every politico who would take it to prevent a crackdown on their lending practices and the amount of leverage they were using. They went to incredible leverage levels to make their earnings numbers so that their politically appointed leaders could collect millions and hundreds of millions in salary and bonus.

Fannie and Freddy were the underwater earthquake that’s now creating this financial tsunami because the mortgage backed securities market involves trillions of dollars spread throughout the globe. History will show that a relatively few Democrat political hacks looking to line their own pockets may have cause the most massive financial panic in history.
9.19.2008 7:24am

UPDATE #2 This post on the Global Labor blog strikes me as wise and somber. It should be read. That link is now updated.

UPDATE #3: This Bloomberg piece has blown the lid off this story. The author is already getting threats. Guess from who ?

Obama’s economic policy

Wednesday, September 17th, 2008

Today we see the culmination of the wild speculation in the credit markets that has gone on the past ten years. A summary is here. A few highlights.

Last June, Obama vice-presidential selection co-chair Jim Johnson had to resign after his links to the Fannie Mae collapse became public. Who was Jim Johnson?

Johnson created the Fannie Mae Foundation where he served with distinction as its chairman and CEO from 1991 to 1998. In 1999, he became CEO of Fannie Mae.

As of 2006, Johnson is a vice chairman of the private banking firm Perseus LLC, a position he has held since 2001. He is also a member of the American Friends of Bilderberg, the Council on Foreign Relations, and the Trilateral Commission.

Johnson earned the Master’s degree in Public Affairs from Princeton University’s Woodrow Wilson School in 1968, and the Bachelor of Arts degree from the University of Minnesota in 1965.

What was his finance background ?

Well, he has worked for Democrat politicians.

Johnson began his career as a faculty member at Princeton University, later moving on to the United States Senate as a staff member and to the Dayton-Hudson Corporation (now Target Corp.) as director of public affairs. He was executive assistant to Vice President Walter Mondale during the entire Carter Administration (1977-1981). Later, he founded and headed Public Strategies, a private consulting firm, from 1981 to 1985 before leaving for Lehman Brothers.

Does that sound like finance ?

How about Franklin Raines ? Well, he at least has some background in finance, although his chief claim to fame is working for Democrat politicians again.

A statement issued by Raines said of the consent order, “is consistent with my acceptance of accountability as the leader of Fannie Mae and with my strong denial of the allegations made against me by OFHEO.”[4]
In a settlement with OFHEO and the Securities and Exchange Commission, Fannie paid a record $400 million civil fine. Fannie, which is the largest American financier and guarantor of home mortgages, also agreed to make changes in its corporate culture and accounting procedures and ways of managing risk.

In June 2008 Wall Street Journal reported that Franklin Raines was one of several politicians who received below market rates loans at Countrywide Financial because the corporation considered the officeholders “FOA’s”–“Friends of Angelo” (Countrywide Chief Executive Angelo Mozilo). He received loans for over $3 million while CEO of Fannie Mae. Franklin Raines is currently one of Barack Obama’s economic advisers.

What about Jamie Gorelick ? Well she works for Democrat politicians. What is her finance background ?

Well, she worked for Clinton. Isn’t that enough ?

But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but “predatory.”

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the ’90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America.
As soon as Clinton crony Franklin Delano Raines took the helm in 1999 at Fannie Mae, for example, he used it as his personal piggy bank, looting it for a total of almost $100 million in compensation by the time he left in early 2005 under an ethical cloud.

Other Clinton cronies, including Janet Reno aide Jamie Gorelick, padded their pockets to the tune of another $75 million.

Raines was accused of overstating earnings and shifting losses so he and other senior executives could earn big bonuses.

In the end, Fannie had to pay a record $400 million civil fine for SEC and other violations, while also agreeing as part of a settlement to make changes in its accounting procedures and ways of managing risk.

But it was too little, too late. Raines had reportedly steered Fannie Mae business to subprime giant Countrywide Financial, which was saved from bankruptcy by Bank of America.

Well, there must have been a Republican somewhere in there. Well, McCain tried to get legislation passed in 2005 that would have reined in the out-of-control mortgage giants.

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

It didn’t work and Obama, who took over 120,000 dollars from Fannie Mae is now trying to blame McCain for the debacle. Take a look at the chart.


Wednesday, September 17th, 2008

I just finished reading Robert D Kaplan’s second book on his travels with US military forces all over the world. It’s called Hog Pilots, Blue Water Grunts and was published in 2006. Like the first volume, Imperial Grunts, it describes the US military and ruminates on the 21st century American Empire. Toward the end of Hog Pilots, he has an interesting section on Korea.

The Korea War is poorly remembered by most Americans younger than I am. Worse, it is apparently poorly remembered by younger South Koreans, who trend toward anti-Americanism in spite of the fact that we saved them from the grinding tyranny that their cousins in the north endure. Kaplan’s discussion concerns the future of what the US military in Korea call “The Kim Family Regime”, or KFR.

Kim Il Sung, founder of the KFR, was a nationalist patriot when Korea was occupied by Japan from 1905 to 1945. Kaplan compares him and his regime to Enver Hoxha, the Stalinist tyrant of Albania who fought the Germans in World War II with little help from the Allies. One unusual feature of the KFR was the succession of the son, Kim Jong Il. Most communist states did not see this passing down in families of the same zeal and control from parent to child. The children of Soviet leaders usually turned out to be spoiled sybarites. Not so in Korea where the regime resembles a crime family with several generations within the warlord culture that is part of it. Kim Jong Il has studied his enemies and succeeded in getting the US and South Korea to help prop up his regime in the 1990s when it was near collapse. One reason for the support was fear of the consequences of collapse.

The KFR nomenklatura has noted the consequences of the opening to the west in East Germany. It is unlikely that such a scenario could be managed. North Korea has a 1.2 million man army, much of which is not much better fed than the civilians. There is a 100,000 man special forces contingent that is well fed and well trained. In the event of war, they would use chemical weapons and would devastate the Seoul area, where nearly half of South Korea’s population lives. This is a great fear for the south and the huge KFR artillery emplacements aimed at Seoul reenforce the danger. What does the future hold ?

An expert, who outlined the current thinking about the KFR and its recent history, described the situation in five (or seven) phases.

Phase One- Resource depletion. That has gone on for years as forests are cut down and people are reduced to eating bark

Phase Two- Failure to maintain infrastructure in the country. That has gone on for years except for the military.

Phase Three- The rise of independent fiefdoms or warlords. That has occurred and contributes to corruption and the Mafia-like state.

Phase Four- The rise of such fiefdoms to the point that the KFR tries to suppress them. That was occurring in the 1990s and was relieved by subsidies from South Korea and China plus our own contributions in the farcical attempts to delay North Korean nuclear weapon development.

Phase Five- Resistance against the central government. That has not yet occurred. Kim Jong Il has been able to control his regime thus far although it is failing.

Phase Six- The regime fractures.

Phase Seven- New national leadership.

The conclusion was that the KFR had reached Phase Four in the 1990s but is now back to Phase Three, as of 2006 when the book was written. So far the regime is controlling the army and that is how it rules.

What are the likely scenarios if it collapses ?

Will the army fight for the KFR if there is a warlord rebellion ? Only the elite units are well fed. The civilian population, of course, is starving. The Romanian example can be used for guidance. A revolt by workers in 1987 was crushed by the army but another, by ethnic Hungarians in 1989, resulted in the army deserting the regime. A US army colonel Kaplan spoke to, felt the regime might collapse but the army remain intact. That might involve a combination of humanitarian relief and combat. An ugly situation and similar to Somalia but on a larger scale. The difference is that KFR has nuclear weapons and who knows who might get control of them ?

China is a huge player in all this. Koreans are united in their hatred of Japan, a cruel master for a half century. China has been propping up the KFR, all the while building infrastructure in Manchuria in anticipation of controlling at least part of North Korea when the collapse comes. They want the ports that will become available. There are thousands of North Korean refugees in China, most living as illegals but some may be a nucleus for a puppet state after collapse of the KFR.

Russia is weak in the East but has been a sponsor of the KFR which considers China a mixed blessing.

The possibility of an attack on South Korea as part of the death throes of the KFR regime has to be considered. It would make Iraq look like a softball game. There may even be an attempt to draw a reaction by the US by some action by the KFR, followed by a limited attack (possible shelling of Seoul) on South Korea to produce a schism between the US and its ally. It is an extremely dangerous situation.

And Kim Jong Il has had a stroke this week.

Obama’s foreign policy

Monday, September 15th, 2008

UPDATE: He also knows economic facts that no one else knows. Amazing !

Lately, we have seen a number of members of Congress, perhaps anticipating a change in the administration, taking it upon themselves to conduct private foreign policy. Nancy Pelosi visited President Assad of Syria in spite of requests not to do so. It didn’t go very well, but she was undiscouraged.

After a meeting with Syrian dictator Bashar al-Assad in Damascus, Ms. Pelosi announced that she had delivered a message from Israeli Prime Minister Ehud Olmert that “Israel was ready to engage in peace talks” with Syria. What’s more, she added, Mr. Assad was ready to “resume the peace process” as well. Having announced this seeming diplomatic breakthrough, Ms. Pelosi suggested that her Kissingerian shuttle diplomacy was just getting started. “We expressed our interest in using our good offices in promoting peace between Israel and Syria,” she said.

Only one problem: The Israeli prime minister entrusted Ms. Pelosi with no such message.

Oh well. You can’t blame a girl for trying.

Potentially far more serious, is candidate Obama’s attempt to negotiate with the Iraqi government. Remember the alleged “October surprise” that had George Bush I supposedly asking the Iranians not to release the hostages before the election in 1980 ? Well, Obama apparently decided that he would try the same tactic, even if the other story was fantasy.

WHILE campaigning in public for a speedy withdrawal of US troops from Iraq, Sen. Barack Obama has tried in private to persuade Iraqi leaders to delay an agreement on a draw-down of the American military presence.

According to Iraqi Foreign Minister Hoshyar Zebari, Obama made his demand for delay a key theme of his discussions with Iraqi leaders in Baghdad in July.

“He asked why we were not prepared to delay an agreement until after the US elections and the formation of a new administration in Washington,” Zebari said in an interview.

Obama insisted that Congress should be involved in negotiations on the status of US troops – and that it was in the interests of both sides not to have an agreement negotiated by the Bush administration in its “state of weakness and political confusion.”

I guess he is that threatened by any progress in Iraq that he is actively trying to impede it. I wonder if anyone will care?

John McCain and the Senate

Sunday, September 14th, 2008

Divid Frum today posted a question about the effect on reformers of frustration with the political system. He intended the comment to apply to Sarah Palin.

Periodically there is an eruption of reform. The leaders of these eruptions have to be brave and charismatic. They excite intense loyalty among their followers – and provoke keen resentment among those who have enjoyed the old ways of doing business.

But it also often happens that this same bold leader has a strong messianic streak. They see no difference between themselves and their movement. They draw fierce lines between friends and enemies. They intensely resent criticism. They see no contradiction between their demand for total openness from others – and secrecy for themselves. They can be paranoid and vindictive – because after all, their enemies are enemies of the great cause.

I think this applies to John McCain. He has spent 25 years trying to cope with the traditions of the Senate as they apply to the present circumstances in politics. It is one reason why he and Joe Lieberman are such close friends. Prior to the 2000 election, Lieberman was a maverick like McCain. He supported school vouchers and opposed ethanol subsidies. He made the very good points that the teachers unions had obstructed any effort to reform schools and the ethanol subsidies had benefited corporate farming interests, like Archer Daniels Midland company at the expense of urban motorists like those represented by Lieberman. Once he was chosen by Al Gore as his VP nominee, Lieberman altered his positions to accommodate Democratic Party orthodoxy.

Once there was a tradition of Senators advocating positions that were good for the country. Senator Lister Hill, the son of a physician and named for the discoverer of antisepsis, was an advocate of building hospitals in the days when medical care was a good government issue. John Stennis was an advocate for national defense, although both of them were segregationists in the days when the South was segregated. Harry Truman was an obscure Senator, chosen by the political boss of Kansas City to be a Senator. After Pearl Harbor, there was a great deal of anger at the failure of intelligence and concern about war profiteering and corruption. Truman was placed in charge of a committee on the conduct of the war. It was called the Truman Committee and its honest and serious investigation of the Roosevelt Administration’s activities catapulted Truman to fame and the vice-presidency in 1944. It didn’t matter to him that the President was of his own party.

Today we see Senators like Trent Lott, whose interests were chiefly with pork barrel spending. Lott was an advocate for his state and the shipyards of Pascagoula, Missisippi, even supporting building ships that were not wanted by the navy.

The Senate majority leader, Trent Lott, wanted a half-billion dollars to start building a $1.5 billion ship called the LHD-8 at the Ingalls Shipyard in Mississippi, his home state.

The Senate, at his behest, approved the money this summer. But the House did not. Last month, House aides asked the Navy how much money really was needed to start the project. Last week, the Navy drafted an answer: $295 million, a lot less than Senator Lott wanted.

One of Senator Lott’s senior aides, a retired Navy officer, obtained the draft and faxed a handwritten memorandum on the senator’s stationery to an admiral at the Pentagon.

The memorandum said $295 million was ”the wrong answer.” The right answer — the answer that ”the Navy needs to support” — was ”at least $375 M to $500 M,” it said. ”We have worked too hard to give up on the $500 M now.”

The implication, according to several people involved in the process, was that the Navy should alter its testimony to support Senator Lott’s position. It has not.

McCain has fought a lonely fight against unnecessary spending. Some of his difficulties with his Republican colleagues comes from these lonely battles. His honor has always been his first concern, as archaic as that seemed in 2008 politics. In this very fair profile of McCain, we still see the leftist slant.

Galanti, like several other ex-POWS, was a supporter of Swift Boat Veterans for Truth, the group that spread unfounded accusations about John Kerry in 2004. The “Swift Boat” attacks against Kerry were a delayed reaction to what some veterans saw as Kerry’s betrayal of their cause upon his return home from Vietnam. “I have some pretty strong feelings about those sorts of people,” Galanti said.

Anyone who followed the story, knows that the swiftboat skippers told the truth about Kerry. This admission is code for the writer’s political stance, just as you could tell the communists in World War II by their reaction to the Hitler-Stalin nonaggression pact in 1939, then the German invasion of the USSR in 1942.

Now McCain has found a kindred spirit in Sarah Palin. I think that is a factor in his choice of her as a running mate. The fallout from this decision is still coming. Governor Palin has been furiously attacked from the left but she has found unlikely allies. The basic message, as I see it, is that McCain has found an ally in his lonely quest and is invigorated. She has been the subject of furious attacks but seems able to shake them off. They are a great combination and McCain has finally someone besides Joe Lieberman who can stand beside him and fight for what he thinks is important.

I have heard and read that he might be threatened by her popularity but I don’t see it that way. I think he has been grateful to share the burden and is no longer condemned to fight his battles alone. This is a man who was willing to defy his captors. Threats from a wimp like Obama are unlikely to deter him and will only give him more incentive.

Of course, the lies are out there.

The OODA loop

Sunday, September 14th, 2008

I have previously commented on John Boyd, here, and am a fan of this man’s work.

The ideas of U.S. Air Force Colonel John Boyd (1927-1997) have transformed American military policy and practice. A first-rate fighter pilot and a self-taught scholar, he wrote the first manual on jet aerial combat; spearheaded the design of both of the Air Force’s premier fighters, the F-15 and the F-16; and shaped the tactics that saved lives during the Vietnam War and the strategies that won the first Gulf War. In addition, Boyd led the Military Reform Movement in the 1970s and 1980s, calling for radical change in Pentagon procurement procedures. A perceptive and original thinker, he synthesized ideas from across disciplines to formulate his own philosophy about warfare, competition, decision making, and the nature of leadership.

Many of America’s best-known military and political leaders consulted Boyd on matters of technology, strategy, and theory. His notions of time cycles and competitive behavior – known as the OODA loops (Observation, Orientation, Decision and Action) – have influenced not only military combat but also business models in the U.S. and abroad. Yet despite Boyd’s influence within the military and in variety of professional circles, he published nothing, preferring military briefings as his medium.

In the Mind of War, Grant T. Hammond offers the first complete portrait of Boyd, his groundbreaking ideas, and his enduring legacy. Based on extensive interviews with Boyd and with those who knew him as well as on a close analysis of Boyd’s briefings, this intellectual biography brings the work of an extraordinary thinker to a broader public.

That is from a review of another book about him and his influence on the military. Now, Michael Barone, an analyst of politics, has picked up on the OODA loop terminology of Boyd to describe the McCain campaign.

John McCain was trained as a fighter pilot. In his selection of Sarah Palin, and in his convention and campaigning since, he has shown that he learned an important lesson from his fighter pilot days: He has gotten inside Barack Obama’s OODA loop.

That term was the invention of the great fighter pilot and military strategist John Boyd. It’s an acronym for Observe, Orient, Decide, Act.

“The key to victory is operating at a faster tempo than the enemy,” Boyd’s biographer Robert Coram writes. “The key thing to understand about Boyd’s version is not the mechanical cycle itself, but rather the need to execute the cycle in such a fashion as to get inside the mind and decision cycle of the adversary.”

The Boyd story has many facets. He also pioneered the principles of fighter design that are still used by the Air Force.

Then team Obama and its many backers in the media failed to Decide correctly, so when they Acted they got it wrong. Their attacks on Palin tended to ricochet and hit Obama.
Is she inexperienced? Well, what has Obama ever run (besides his now floundering campaign)? Being a small-town mayor, as Palin said, is like being a community organizer, “without the actual responsibilities.”

Is she neglecting her family? Well, how often has Obama tucked his daughters in lately? For more than a week we’ve seen the No. 1 person on the Democratic ticket argue that he’s better prepared than the No. 2 person on the Republican ticket. That’s not a winning argument even if you win it. As veteran California Democrat Willie Brown says, “The Republicans are now on offense, and Democrats are on defense.”

Pretty interesting. Much more on Boyd here.