....Guys, I could spend days formatting and properly explaining what happened, there are some gaps in my analysis, but I believe I captured the essence of what's going to affect all of us. Here are the facts and causes as I see it.
- The repealing of the Glass-Steagall Act
What is it: A law passed by Congress in 1933 that prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities"
What did it do: It protected bank depositors from the additional risks associated with security transactions. The act was repealed in 1999 and the distinction between commercial banks and brokerage firms has blurred
Why is this important: If the trading of mortgage backed securities was limited to brokerage firms, it would not affect commercial banks as significantly
- Community Re-Investment Act of 1977
Requires banks to lend in Low-Income neighborhoods where they take deposits
- Affordable Housing Goals Set by Fannie and Freddie Mac - banks began to feel pressured to loan more and more money in low income neighborhoods and to people whom they would not otherwise lend money to. Not doing so meant tougher regulation and shakedowns from various government entities including but not limited to the senate banking committee
- Political Correctness - Loosening of credit and increasing homeownership was the thing to do. If you didn’t loan a certain percent in certain neighborhoods you would get shaken down by local (I hate to say it) community organizers and be labeled as racist on the local news.
- Fannie Mae and Freddie Mac - sometime in the 90’s, they began purchasing more and more high risk mortgages, the more they bought the more they were at risk of failure due to massive defaults. (it only takes about an incremental 2% of all homeowners to begin defaulting to cause a crisis like this)
- Democrats - I can't begin to write all this down, but Chris Dodd and Barney Frank have thier hands all over this
How this all ties together
- Every Mortgage purchased by Fannie and Freddie increased a bank’s liquidity. The bank’s credit limit would be tied in a mortgage, therefore not allowing it to make other loans (car’s, HELOC’s, etc)
- Fannie Mae and Freddie Mac would bundle individual mortgages they purchased into securities (Bonds and funds). Fannie and Freddie were not required to disclose the "mix" of mortgages in these securities. For example: Security X had 100 mortgages and 50% of them were high risk sub-prime.
- Fannie and Freddie would guarantee the securities against default and sell them to investors (commercial banks and brokerage firms). These now combined banks/brokerage firms are the same entities making bad loans. (Under Glass-Steagall they had to be separate)
- Fannie and Freddie also bought mortgages from banks and other lenders and hold them in their own portfolios. This market for mortgages (i.e. mortgage backed securities) allowed the lenders to make more loans by freeing up obligations / credit (fancy word used for it in the news is "increase liquidity")
- Remember the rules of banks, they are required by law to maintain a certain level of liquidity. I.e. if you have a $100 in deposits, you can only lend X% of that. Well, if you sold the loan, buy it back in the form of a security and hold it in your brokerage firm (which you happen to own) then you are free to make more loans against that $100 (more bad loans by the way). But they all end u in the same place.
- Big Mess. Some say caused by lack of regulation others say caused by too much regulation. I am on the too much regulation camp. Free markets dictate that many of the bad loans made would not have been made if not for affordable housing goals!
- Personal Experience: I've had 4 mortgages in my life: 1997, 2003, 2006 and 2007 (4 different houses). I remember my first mortgage (don't we all) at 25. I was well qualified for my 72K condo in westlake OH. But remember having to provide all by a blood sample to get the mortgage, this was before I signed any loan papers. Fast forward to 2007 and I was simply asked if I am willing to document my income!
So what does the bailout do
- Here is where it gets ironic, the 700 Billion Dollars congress will authorize the treasury to spend will be used to buy back all these bad mortgages sitting with banks and mortgage companies and brokerage firms (Market creation)As the gov’t buys them, they will free up the banks liquidity to make more loans and lines of credit. Which is what got us into this mess to begin with
- Why I don’t support it:
They say "credit will tighten" or "dry up". Who cares! This is absolutely true. But guess who it dries up for… it dries up for people who are not freaking qualified to begin with. Those with good credit can still get loans, the rate may go higher and it may be more difficult. The word difficult I use losely. This means it may take more than 15 mins to get a loan, heaven forbid it may take a day or two and an actual loan officer (live person) may have to review the application and you may actually have to document and prove your income.
- There are free market solutions out there, I'll get into those on a separate post
- Context: 700 Billion is enough cash to give every US citizen from 0 to 100 years old, rich poor, whatever (as long as you have a SSN) approximately $2,300. (I’ll hit that in a separate post)
I am sure many of you are glued to tv's watching this, but this is what I see. I will post on the solutions later. The bailout is a bad thing and a stupid thing, the GOP was smart not to back it and Mccain should grow a pair and withdraw support and leave OBAMA to push it. If it were so important the Dems can pass it without a single GOP vote. But they won't do that, they want to hang around the GOP's neck if it fails and take credit in the unlikely event that it actually works!
If Obama, the Lord Messiah and most merciful one (as Rush likes to call him) is such a uniter all he has to do is rally his own party and pass it and save the country. But the little political weasel man child won't do it because he knows it won't work!
Hopefully this is helpful