Columbia SC Real Estate and Homes for Sale

and yes, after doing some more reading on it, I do still consider it a bailout.

Im going to put a copy of a post that Yves at Naked Capitalism wrote in italics and then my comments will be interspersed in bold print and then Ive got more thoughts at the end.

Hope this helps you understand it better.

Congressional Charade: Changes in Bailout Bill Cosmetic, and Everyone Knows That

For a quick, one-stop synopsis of the Mother of All Bailouts (as of this month), see this readable version at Clusterstock (weve become a recent convert to this site).

Reader and sometimes contributor Lune, who was once a Congressional staffer and still subscribes to the the inside-the-Beltway press, provided a wrap of their coverage of the bailout bill. It makes clear that everyone understands that turning Hank Paulsons three pager into a 110 page draft made for a nice fig leaf but made virtually no substantive difference.

Gee, why doesnt that surprise me.   They added 107 pages of rules and regulations and its basically just spelling out the same difference as before.

From Lune:

Well folks, were almost to a done deal (certainly closer than Thursday). The Hill papers are reporting that theyre getting closer in both the Senate and the House to the needed votes to pass the new bailout bill. Roll Call gives the most frank assessment of what happened over the weekend in an article entitled “Same Bailout, New Dynamic” (subtitle: Outrage Prompts Sales Effort).

All the late-night talks, last-minute demands and dramatic pronouncements aside, the fundamental structure of a $700 billion Wall Street rescue plan that Congress spent the weekend wrangling over has not changed significantly from the outline proposed by a bipartisan group of Senators and House Members last Thursday.

Did you hear that?:  Its basically the same deal as last week Thursday, just spun differently.

“This is in essence the same,” said Sen. Bob Corker (R-Tenn.), who attended those talks.
. . .
Assuming enough House Republicans agree to vote for the package, it appeared that the House could vote as early as today, while the Senate might have to wait to take it up Wednesday after Rosh Hashana on Tuesday.

“If it doesnt pass, we shouldnt be in Congress,” a confident Sen. Judd Gregg (R-N.H.) said on Sunday, adding that he thought the measure would pass with broad bipartisan support in both chambers.

Maybe we shouldnt be in Congress?   Now theres one of the best ideas that Ive heard from an elected official in a while.

Members and staff disagreed about why the bones of the package stayed the same but took so long to hash out.

Ive got an idea on why it took so long - political posturing and spin that would hopefully give enough people the time to “fall in line.”

Negotiators on Saturday added a mortgage insurance program to the proposal at the request of rebellious House Republicans, though that plan is unlikely to be used by failing companies given the Treasurys ability to take bad debt off the books of troubled financial firms.

Read that last sentence again - the mortgage insurance plan is unlikely to be used - why?   Because the Treasury is going to buy the debt otherwise.   Look at it this way, youve got a 1974 Plymouth Valiant (dont laugh, I had one in college) that has 240,000 miles on it but it still runs.   If you bought insurance for it, it would cost you $1000 a year for insurance.   However, if you didnt buy insurance, and the car got totalled (became “worthless,” you could sell it to the government for $2500.)    What would you do?

That means the high-stakes negotiating sessions over the weekend served mainly to generate buy-in and political cover for Republicans and Democrats.

Some Democrats said the time between Thursday and Sunday was largely wasted on back-and-forth talks that yielded few changes. In addition, there was the distraction of presidential nominee Sen. John McCain (R-Ariz.) inserting himself into the mix, they said. Keep in mind its Democrats who are saying that the Republican candidate got in the way - its all about spin…..

“They were very close to an agreement on Thursday,” one senior Senate Democratic aide said. “Then John McCain blew into town and blew things up for three days. Now, they have virtually the same agreement now that they had before, with a couple of options in it that [Treasury Secretary Henry] Paulson will never use.”

One Senate Democratic leadership aide echoed that notion, saying, “This is largely based on the draft we had Thursday morning. … Once we got past the McCain shenanigans, the legislative process took over and people worked very hard to work out an acceptable agreement.”

. . .
House Republicans proposed a mortgage insurance idea so Wall Street could fund its own bailout. House Democrats proposed a pay-as-you-go trigger requiring a fee on financial firms if the bailout results in losses for the Treasury.

The political goal was the same – both sides wanted to be able to tell constituents that Wall Street, not average citizens, would pay for the bailout.

Read that again, both sides wanted to be able to tell constituents that Wall St, not Main St. will pay.   Does it say, “BOTH SIDES WANT TO MAKE SURE THAT WALL STREET PAYS?"   Nope, its about image.

But neither proposal won out – the mortgage insurance idea will largely be a side option for the Treasury secretary, and Paulson reportedly already rejected the proposal in internal Treasury talks this summer.

. . .
A senior House Democratic aide at press time estimated that Democrats could wrangle about 125 votes for the plan, meaning GOPers would need to find nearly 100 supporters in their ranks if the numbers remained unchanged.

All eyes are on the House. From another article in Roll Call entitled “House Moves Shakily Forward on Bailout“:

Both the House Republican Conference and House Democratic Caucus spent hours cloistered in closed-door sessions Sunday night as Congressional leaders tried to gather support for the package within their own ranks by putting outstanding questions about it to rest.

All eyes are on the House Republicans, who threw talks on a deal into disarray Thursday when they abandoned bipartisan, bicameral negotiations with the White House.

. . .

The bill filed tonight is “a giant improvement” over previous proposals, namely because it considerably reduces taxpayer risk, House Minority Leader John Boehner (R-Ohio) told reporters after the meeting.

“At the end of the day, there really is no taxpayer risk in this bill,” Boehner said, referring to mandated insurance provisions in the package.
Gee, how does he figure that?   The US Taxpayer is going to buy $700 Billion in bad loans and there is no tax payer risk?   Im glad hes not a commercial lender at my bank…..

Asked how many Members will vote for the bill, Boehner said he didnt know but that GOP leaders “are working on it. … I made it pretty clear to our Members that we are supporting this.”

. . .

At one point, Rep. Mike Pence (R-Ind.) [Ed: chair of the Republican Study Committee, a conservative Republican caucus in the House which has been the primary roadblock to the bailout plan] received “a tepid response” when he proposed starting from scratch and coming up with a new bill, according to one aide.

. . .

Rep. Scott Garrett (N.J.), a member of the influential Republican Study Committee, told reporters outside the Conference meeting that at least some of the conservative group will back the plan, although he said he would be voting against it.

I heard on Wood Radio this morning that Pete Hoekstra (Republican Congressman from “my” county) will be voting against it.   Thank you Pete!

And finally, the wizard behind the curtain is revealed (”Its Franks World, We Just Live In It“):

In case there was any doubt who was running the show over the past week, or how confused even most Members were about what was happening with the Wall Street bailout, a few lawmakers confirmed it for us.

A handful of Members – guys who are ostensibly getting briefings and actually sit in on meetings – were apparently so confused about the status of the bailout, they sunk so low as to actually join press scrums (those knots of lowly reporters crowding a particularly in-the-know Member) around House Financial Services Chairman Barney Frank to try to get a clue.

Is it any surprise that Congresspeople elected for their ability to clear brush or deliver sound bites with a photogenic smile are about to cast one of the most important votes of their careers without a clue about what theyre voting for? Winston Churchill once said “The best argument against democracy is a five minute conversation with the average voter". The American corollary to that adds a 5 minute conversation with the average elected representative…

Now some more comments from me about this:

1. Is the Financial world in trouble right now?   Yes it is.   The financial services world grew to bloated heights fed on the search for new and easy debt.   That party has blown up in our faces.   We are now faced with a readjustment of the financial markets.    I read an article this morning that said that when Sweden went through a similar problem in the early 1990s, what they did is they looked at it and said, “Which banks are healthy enough to make it?"  Then, they set up a plan to help those and set up a plan to liquidate and/or merge the ones that arent.   I guess you could call it a sort of “Financial Triage."    For those of you not familiar with the term “triage” its a medical term for sorting out, at the scene of a disaster, the patients who are dead, not going to make it, can make it given immediate support and/or are fine.

2. Do I think we need to do “something” right now?   Yes I do, but I dont feel good about this.   Id really like to, instead, see something similar to the Sweden plan that would work not to keep everyone floating (because lets face it, its getting to be a pretty long list of instituitions that have sunk in the last 2 weeks alone) but to keep those who are strong enough going so they can service the new financial markets that are evolving.

3. What impact will this have on the housing market and real estate market?   Im not really sure, but heres my take on a couple of scenarios:

• If the bailout works well and truly stabilizes the markets, we could see rates holding steady and consumer confidence returning and more people venturing out into the real estate market.
• If the bailout doesnt work well and the markets continue to remain troubled, then were going to see the non-Fannie-Freddie-FHA markets dry up.   That doesnt bode well for those in the higher priced markets (where over $417,000 is needed to buy a house).
• If the bailout raises concerns about the borrowing capabilities of the US Treasury (because of the massive amount of debt that its taking on, then I think were going to see rates start creeping upward.

Of those three options, Id put the odds at 20% that the bailout works well, and split 40/40 between the other two.

Keep in mind, these are only my opinions, thoughts and ruminations about the dynamics that are literally changing on almost a minute by minute basis.

Hope this helps, let me know if you have questions,

Tom Vanderwell

Here are some excerpts from the press conference on the Government taking over Freddie and Fannie.  I will go more in depth on what this means to Columbia SC Real Estate!

Treasury Press Release

I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

What hes talking about in terms of the inherent conflict is that Fannie and Freddie are essentially government institutions with shareholders and that creates a conflict of who do they serve - the shareholders or the common good?

I attribute the need for todays action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs.

Out with the old, in with the new - and we hope that the main people besides for upper management dont leave.

First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth.

That means that if Fannie or Freddie has a bad quarter and loses enough so that they become upside down, we get to turn on the faucet and fill them up with more cash.   Your cash and mine.

It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set.

On an as needed basis - as often as needed and on terms the Treasury has set (only when they go negative).

Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.

If you hold common stock in Fannie or Freddie, you are the first one to get hit with the losses.

Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.

If you hold preferred stock, you are second in line to get hit with the losses.   Oh, and we know that a lot of  banks own preferred stock in Fannie and Freddie and thats not going to be healthy for their books.   But its only going to sink a couple of banks, so thats a worthwhile risk.    Tell that to those banks!

The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

Fannie and Freddie need cash in order to keep on writing loans.   Lots and lots of cash.

Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS.

That means that they are going to pick up the slack, I mean we, are going to pick up the slack and start buying the loans that Fannie and Freddie are packaging and selling.

And let me make clear what todays actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.

The consequences of allowing Fannie and Freddie to go under were simply too big and too disastrous to make that possible.   Think Nightmare on Elm Street, Doomsday scenario for the financial markets……

Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes.

The discussion needs to take place on what are Fannie and Freddie going to look like down the road.   The future of mortgage lending will end up looking much different than it does now.

Ill have more as I have the chance.

Tom Vanderwell