Financial Crisis News 02-23-09
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Editor, The Konformist
Bank nationalisation gains ground with Republicans
By Edward Luce and Krishna Guha
February 17 2009
Long regarded in the US as a folly of Europeans, nationalisation is
gaining rapid acceptance among Washington opinion-formers and not
just with Alan Greenspan, former Federal Reserve chairman. Perhaps
stranger still, many of those talking about nationalising banks are
Lindsey Graham, the Republican senator for South Carolina, says that
many of his colleagues, including John McCain, the defeated
presidential candidate, agree with his view that nationalisation of
some banks should be "on the table".
Mr Graham says that people across the US accept his argument that it
is untenable to keep throwing good money after bad into institutions
such as Citigroup and Bank of America, which now have a lower net
value than the amount of public funds they have received.
"You should not get caught up on a word [nationalisation]," he told
the Financial Times in an interview. "I would argue that we cannot be
ideologically a little bit pregnant. It doesn't matter what you call
it, but we can't keep on funding these zombie banks [without gaining
public control]. That's what the Japanese did."
Barack Obama, the president, who has tried to avoid panicking
lawmakers and markets by entertaining the idea, has moved more
towards what he calls the "Swedish model" an approach backed
strongly by Mr Graham. In the early 1990s Sweden nationalised its
banking sector then auctioned banks having cleaned up balance
sheets. "In limited circumstances the Swedish model makes sense for
the US," says Mr Graham.
Mr Obama last weekend made clear he was leaning more towards the
Swedish model than to the piecemeal approach taken in Japan, which
many would argue is the direction US public policy appears to be
"They [the Japanese] sort of papered things over," Mr Obama
said. "They never really bit the bullet? - and so you never got
credit flowing the way it should have, and the bad assets in their
system just corroded the economy for a long period of time."
Administration officials acknowledge that the rescue plan unveiled by
Tim Geithner, Treasury secretary, last week could result in the
temporary nationalisation of some weak banks.
The plan sets out a framework for revealing the extent of the likely
credit losses facing banks. Most private sector analysts believe the
exercise will reveal that some banks have large capital shortfalls.
Policymakers acknowledge that if this is indeed the case, it will be
difficult for those with the largest shortfalls to raise the required
equity from the markets, in which case the government would probably
have to take temporary control. Moreover, while nationalisation
remains taboo in some political circles it is increasingly openly
discussed among past and present economic policymakers of all
"In this country nationalisation of some banks not the whole
banking sector should be a last resort, but it should definitely
now be on the table," said David Walker, head of the pro-free market
Peterson Institute and a former senior official in the George W. Bush
The time for biting the bullet may also be fast approaching.
In early April, big institutions will publish their first-quarter
results. If the intervening Treasury stress tests have not by then
revealed the true state of their balance sheets, then their first-
quarter results may do so.
"The first week in April that's when the children's party is over,"
says Chris Whalen, co-founder of Institutional Risk Analytics. "That
is when the obvious will become apparent."
The Obama administration remains opposed to federal control. Mr
Geithner last week said: "Governments are terrible managers of bad
Others say he may eventually face no choice. "The danger we face is a
Freddie Mac/Fannie Mae scenario where government gives the banking
sector guarantees and then socialises the losses," says Adam Posen,
an economist. "That's the worst thing we could do."
Obama Sets $75 Billion Mortgage Rescue Plan
The "backyard bailout" proposal aims to help up to 9 million at-risk
homeowners refinance or restructure mortgages
By Phil Mintz
February 18, 2009
President Barack Obama on Feb. 18 announced a plan to stabilize the
faltering housing market by allowing up to 9 million families to
refinance or restructure at-risk mortgages through a $75
billion "homeowner stability initiative" and other incentives to keep
homes out of foreclosure.
Obama is selling the planalready being dubbed a "backyard bailout"
by stressing that foreclosures have a huge impact on entire
communities and reduce the price of all homes.
How It Works
According to a fact sheet distributed by the White House, the plan,
which Obama outlined in a speech in Mesa, Ariz., has three main
Allowing up to 5 million homeowners who have seen the value of
their homes decline to refinance mortgages through the government-
sponsored mortgage entities Fannie Mae or Freddie Mac
A $75 billion fund that would assist up to 4 million home owners to
modify subprime mortgage loans so that payments would be no more than
31% of household income and incentive payments to servicers to
successfully modify mortgages
Shoring up market confidence in Fannie Mae and Freddie Mac by
doubling the government's investment in the companies to $200 billion
each and increasing the size of their retained mortgage portfolios.
Obama also expressed support for a change in bankruptcy rules that
would allow judges to modify first-mortgages held by defaulting
homeowners. Such modifications are currently only allowed for
mortgages on multifamily homes, vacation houses, and investment
properties. The financial services industry has been opposed to
the "cramdown" proposals.
In Arizonaone of the areas of the country hardest hit by declining
home prices Obama stressed that foreclosures affect not only those
who are being forced out of their homes but the surrounding
neighborhoods as well. "In the end, all of us are paying a price for
this home mortgage crisis. And all of us will pay an even steeper
price if we allow this crisis to continue to deepen," Obama said.
Next: The Political Sell
That argument that all homeowners have a stake in the outcome is key
to persuading homeowners who are paying their mortgages to support a
plan that helps those who cannot do so, said Howard Glaser, a former
Clinton Administration housing official and a consultant to Fannie
Mae and Freddie Mac.
"A $500 check to your next-door neighbor is more 'real' to many
people than the abstraction of shoveling hundreds of billions into
bailouts for banks headquartered thousands of miles away," Glaser
said in a report on the plan. "Obama will need to employ all of his
communications skills to explain why all Americans benefit from using
taxpayer funds to help homeowners in trouble.
Obama said that the plan "will not save every home" and will not
apply to speculators or "rescue the unscrupulous or irresponsible And
it will not reward folks who bought homes they knew from the
beginning they would never be able to afford." Guidelines for the
mortgage modification plan will be announced when the program begins
on March 4.
But it remains unclear whether that will overwhelm critics who argue
that the plan promotes "moral hazard" by encouraging people to take
excessive risks knowing that someone will bail them out.
"The government could end up subsidizing mortgage borrowers, lenders,
and servicers to the tune of more than $10,000 as part of this
program." said Mike Larson, real estate and interest analyst at Weiss
Research in Jupiter, Fla. "How is that fair to borrowers who played
by the rules That's what many Americans are going to be asking, and
what many politicians are going to be hearing from callers."
Mintz is news editor for BusinessWeek.com in New York.
Obama's Housing Bailout Draws Comparisons to McCain's Plan
President Obama's $275 billion housing bailout plan, aimed at halting
mortgage foreclosures, is drawing comparisons to a proposal
championed last year by John McCain.
Thursday, February 19, 2009
President Obama, in rejecting GOP alternatives to his massive
economic stimulus plan, cited his electoral victory over John McCain
in November as proof that Americans wanted change.
But Obama's $275 billion housing bailout plan, aimed at halting
mortgage foreclosures, is drawing comparisons to a proposal
championed last year by John McCain.
"I hope they took the best ideas wherever they found them. And,
certainly, Senator McCain campaigned for a long time on this
proposal," said Douglas Holtz Eakin, former economic adviser to
McCain and author of McCain's plan.
Obama's $275 billion program offers $75 billion in incentives to
lenders to lower payments by at-risk homeowners to 31 percent of
their income. The other $200 billion would be drawn from money
approved by last year's Congress to bolster efforts by federal
lenders Fannie Mae and Freddie Mac to offer affordable mortgages and
bring stability to the housing market.
Holtz Eakin says Obama has recognized the need to stop foreclosures
before they happen. It's an idea he says McCain introduced at his
second presidential debate with Obama.
"I would order the Secretary of the Treasury to immediately buy up
the bad home loan mortgages in America and renegotiate at the new
value of those homes," McCain said.
McCain said he was following in the footsteps of Hillary Clinton, but
her aides said his plan was nothing like hers.
Housing Secretary Shaun Donovan also says McCain's plan is not like
Obama's, explaining that Obama's is "focused, targeted to those most
at risk of foreclosure and would be far less expensive to the
taxpayer than Senator McCain's plan."
Democrats said McCain's $300 billion plan would have had the
government basically eat the cost of reduced property values.
"Taxpayers shouldn't be asked to pick up the tab for the very folks
who helped create this crisis," Obama said on the campaign
trail. "And that's the problem with Senator McCain's risky idea."
Now Obama's $75 billion plan would have the government and the
finance industry share the cost of declining property values for a
smaller group, though it envisions pumping $200 billion more into
Fannie Mae and Freddie Mac, which McCain criticized in the fall for
supporting the Obama campaign.
"His pals there and the Democrats in Congress that refused to reform
Freddie Mac and enact legislation to stop this crisis," McCain
charged on the campaign trail.
Donovan, however, says the money is just a backstop.
"We have no expectation that the full amount would be needed,
certainly not in the short run," Donovan said.
On that score, however, Obama officials say they are facing the
problem of having to rescue institutions that are too big to fail.
Fannie Mae and Freddie Mac are the mortgage market today, Obama
officials say. They account for the vast bulk of mortgages and
without them mortgage rates would soar and far fewer mortgages would
FOX News' Wendell Goler contributed to this report.
Rick Santelli: Asshole of the Year...
CNBC's Santelli Rants About Housing Bailout
February 19, 2009
CNBC's Rick Santelli made a splash this morning. It is being
called "Santelli's Rant" or "Santelli's Chicago Tea Party".
Santelli derided the Obama administration's housing rescue plan,
which aims to spend more than $200 billion when all is said and done
to try and keep people in their homes. The goal? By helping the
hardest hit, you help everyone by raising home values.
Back to Santelli. He was at his perch on the floor of the Chicago
Board of Trade and with a nod to those around him he blasted Obama's
plan. Here is a transcript of what he said:
Rick Santelli CNBC transcript (video):
"Mr. Ross has nailed it. The government is promoting bad behavior. We
certainly don't want to put stimulus pork and give people a whopping
$8 or $10 in their check and think that they ought to save it.
And in terms of modifications, I tell you what. I have an idea. The
new administration is big on computers and technology. How about
this, Mr. President and new administration. Why don't you put up a
website to have people vote on the internet as a referendum to see if
we really want to subsidize the losers mortgages? Or would they like
to at least buy buy cars, buy a house that is in foreclosure give
it to people who might have a chance to actually prosper down the
road and reward people that can carry the water instead of drink the
This is America! (he turns to the traders nearby)
How many people want to pay for your neighbor's mortgages that has an
extra bathroom and can't pay their bills? Raise their hand!
President Obama, are you listening?
You know Cuba used to have mansions and a relatively decent economy.
They moved from the individual to the collective. Now they're
driving '54 Chevys.
It's time for another tea party.
What we are doing in this country will make Thomas Jefferson and
Benjamin Franklin roll over in their graves."
Defending President's Housing Proposal, Gibbs Assails CNBC Personality
February 20, 2009
Power, pop, and probings from ABC News Senior White House
Correspondent Jake Tapper
The White House lashed back today at CNBC'S Rick Santelli, a CNBC
personality who assailed President Obama's housing rescue plan
Thursday on the floor of the Chicago Mercantile Exchange.
"I'm not entirely sure where Mr. Santelli lives or in what house he
lives," said White House press secretary Robert Gibbs during a press
briefing. "But the American people are struggling every day to meet
their mortgage, stay in their job, pay their bills, to send their
kids to school, and to hope that they don't get sick or that somebody
they care for gets sick and sends them into bankruptcy. I think we
left a few months ago the -- the adage that, if it was good for a
derivatives trader, that it was good for Main Street. I think the
verdict is in on that."
"Mr Santelli doesn't know what he's. talking about," Gibbs said a
little later. He was responding to a question about public anger at
the fact that some people who acted irresponsibly may benefit from
the president's plan, a question which mentioned "that cable rant on
the floor of the exchange."
"Mr. Santelli has argued -- I think quite wrongly -- that this plan
won't help everyone," Gibbs said. "This plan will help, by the money
that's invested in Freddie and Fannie, will drive down mortgage rates
for millions of Americans."
Concluded Gibbs, "now, every day when I come out here, I spend a
little time reading, studying on the issues, asking people who are
smarter than I am questions about those issues. I would encourage him
to read the president's plan and understand that it will help
millions of people, many of whom he knows. I'd be more than happy to
have him come here and read it."
"I'd be happy to buy him a cup of coffee," Gibbs wryly added, in
remarks he seemed to have prepared. "Decaf."
"Let me do this, too," Gibbs said. "This is a copy of the president's
home affordability plan. It's available on the White House Web site,
and I would encourage him, download it, hit print, and begin to read
Santelli, who has been a member of both the Chicago Mercantile
Exchange and the Chicago Board of Trade, lashed out at the Obama
administration yesterday for "promoting bad behavior."
"We certainly don't want to put stimulus forth and give people a
whopping $8 or $10 in their check and think they ought to save it,"
effused Santelli on CNBC from the floor of the Exchange. "And in
terms of modifications, I tell you what, I have an idea. The new
administration is big on computers and technology how about this,
President and new administration? Why don't you put up a Web site to
have people vote on the Internet as a referendum to see if we really
want to subsidize the losers' mortgages, or would we like to at least
buy cars and buy houses in foreclosure and give them to people that
might have a chance to actually prosper down the road and reward
people that could carry the water instead of drink the water."
There were some cheers from those surrounding Santelli on the floor.
"This is America. How many of you people want to pay for your
neighbor's mortgage that has an extra bathroom and can't pay their
bills? Raise their hand."
There were boos.
"President Obama are you listening?" Santelli asked.
Santelli said, "We're thinking about having a Chicago tea party in
July. All you capitalists that want to show up to Lake Michigan, I'm
going to start organizing it! We're going to be dumping in some
derivative securities, what do you think about that?"
Asked about the general benefit of cable news discussions on the
economy, Gibbs said "people are entitled to their own opinion, not
just their own facts."
Gibbs said "I don't think anybody can sit in front of some of the TV
and listen for an hour and not hear somebody that's making a case
that just -- I've got to assume they knowing -- they know just isn't
He added that if "I hadn't worked on the campaign, but simply watched
the cable news score-keeping of the campaign, we lost virtually every
day of the race...If I would have just watched cable TV, I long would
have crawled into a hole and given up this whole prospect of changing