News and commentary

The Rescue Do-Over – Fuggedaboutit

By Richard Suttmeier
Updated: Thursday, October 02 2008 12:10:PM

The $700 billion Rescue Bill has some new features, but what will the bill accomplish?
 
I am still against the Rescue Bill, when all prior bills and regulations have not produced results.
1.      $165 billion Economic Stimulus – Was supposed to create 500,000 new jobs. Instead the economy has lost jobs in every month in 2008 with the unemployment rate up from 4.7% to 6.1%.
2.      $29 billion for Bear Stearns – Created an "Alphabet Soup" of credit facilities to protect investment banks, then not used for Lehman, a 158 year Wall Street firm. Not giving the lifeline to Lehman is the cause of the current Credit Squeeze.
3.      $200 billion Backstop for Fannie & Freddie - Mortgage rates remain too high. Fannie Mae and Freddie Mac debt spreads are wider than before Conservatorship despite the US government guarantee..  
4.      $85 billion for AIG - What authority gave the regulators this obligation?
5.      $300 billion for HUD to Help Homeowners – The part of the Housing Bill becomes effective October 1. To qualify the homeowner had to have his mortgage originated between January 2005 and June 2007. This $300 billion became available October 1. What’s the Plan on the use of this money? Hope Now and Project Lifeline, two other bank volunteer programs have failed to stop the deluge of defaults and foreclosures.
6.      $50 billion to back up Money Market Mutual Funds.
7.      $700 billion Rescue Bill – Does not tackle the problem, which is defaults and foreclosure.
8.      $100 billion Stimulus Two – Tacked onto the $700 billion.
 
Add it up and you get $1.6 trillion.
 
The objective of a Housing and Financial Rescue Bill must begin on Main Street, which is the foundation, where cracks in mortgage lending resulted in Wall Street creating toxic mortgage backed securities that are clogging up the credit markets. The three regulators, Treasury, Federal Reserve and FDIC all have key roles in the plan, but already have programs and lifelines that have not been properly used.
 
If we are in Dire Straits why does the bill raise the FDIC guarantee to just $250,000 from $100,000 instead of 100% of the seven trillion in US deposits. A key to the plan was stopping runs on the smaller banks both at their doors and on-line. 
 
The new rescue package adds a $100 billion Stimulus Two. The bill prevents the alternative minimum tax from hitting 20 million middle-income Americans. There are other added items I choose not to mention.
 
The feature of the bill I despise lets the government spend billions of dollars to buy bad mortgage-related securities and other devalued assets held by financial institutions.
  • We already own $5.4 trillion in Fannie & Freddie mortgage backed securities and Treasury has yet to valuate them.
  • The Federal Reserve has the credit facilities to take on toxic securities and won’t. But it’s ok for the US tax payer to own them. This is WRONG!
  • Regulators who cannot put a fair value on an asset should not be permitted to but that asset on the back of stressed US citizens, who need mortgage relief.
 
There is nothing in this bill that results in lower mortgage rates for Main Street homeowners. Stop defaults and foreclosures, keep investors on the hook for bad investments made, and eventually the credit markets will defrost.
 
Lehman Fallout - Two new condo projects were stopped last week on East 46, one between 3rd and 2nd, the other between 2nd and 1st. So we have abandoned unfinished buildings with abandoned small cranes. WHY? They were funded by Lehman!! I didn't know they were in that lending business. I wonder how many more stopped projects there are in NYC.
 
Not giving Lehman the Fed lifelines was the cause of the latest crisis. Now it will cost more than $700 billion. There's always a straw that breaks the camel's back!
 
Mortgage Assistance Plans - Of the nearly $12 trillion in US mortgages, $5.4 trillion are Fannie Mae and Freddie Mac, and $2.15 trillion are investments at community and regional banks. This category was down $61.4 billion in Q2 vs Q1 on foreclosure and modifications. Servicers are not lenders unless they hold the mortgage. The lenders are Fannie Mae and Freddie Mac and other lenders who own pieces of the mortgages in the toxic mortgage backed securities. This is why the volunteer programs can’t get the job done.