Libertarian Leanings

The Schumer Shuffle

All too typical of progressive politics:

But with Mr. Schumer, who voted to inflict this burden on an economy still struggling with high unemployment and slow growth, this is an all-too familiar pattern of behavior that can be summarized as follows:

Step One: Vote for destructive law.

Step Two: Complain about said law, while doing nothing to repeal it.

Step Three: Raise campaign money by showing to business community the volume of said complaints.

...

There's a word for people who keep falling for this: suckers.

The End of Fannie and Freddie?

According to the Wall Street Journal a U.S. Treasury report to congress recommends that Fannie Mae and Freddie Mac be phased out in the interest of mortgage market reform.

Under the Administration's proposals, Fan and Fred wind down over five to seven years. The two mortgage giants would, in effect, gradually price themselves out of the mortgage finance market by raising guarantee prices and down payment requirements, while lowering the size of the mortgages they could securitize and guarantee. This sounds like a plausible set of first steps to lure private capital back into the mortgage market, where some 92% of all new mortgages are currently underwritten or guaranteed by the government.

The $5 trillion question, however, is what would replace Fan and Fred. And here the Obama Administration has punted, offering the "pros and cons" of three broad proposals without endorsing any one of them.

Under the option favored at the Journal, federal mortgage guarantees would be offered only by the Federal Housing Administration for lower-income home buyers, veterans, and farm programs, and would affect only 10% to 15% of the mortgage market. 

Option three strikes me as the one most likely to be popular at the White House.

But the greatest danger lies behind Door No. 3, which looks like Fannie in a new suit. Under this last option, the Administration envisages a group of tightly regulated, well-capitalized private mortgage insurers whose policies would be backstopped by government reinsurance. The government would charge premiums for this insurance, "which would be used to cover future claims and recoup losses to protect taxpayers." This reintroduces the lethal mix of private profit and public risk by other means.

Option three would also provide more opportunities for corruption and political payoffs.  The Obama has been doling out taxpayer funds to friendly labor unions and favored industries from the moment he came into office.  Look how many of those exemptions from the onerous health care reform regulations went to unions.  The Obama administration seems to think that regulations are for helping friends and punishing enemies.  One can hardly expect it to stop now.

Unclogging The Credit Pipeline

President Obama's latest economic recovery charade is his $30 billion small business loan program.

The lending program is part of a bill that passed the House of Representatives on Thursday and now awaits the president's signature. The legislation contains a mix of tax cuts and credits aimed at helping small businesses. The centerpiece of the bill is an effort to make billions of dollars available to community banks for loans to small businesses.

It seems like a simple effort to unclog a credit pipeline that has been blocked since the financial meltdown two years ago.

There's a fly in the ointment, though.  Hardly anybody wants credit.

Bank executives say their customers don't want loans, even at low interest rates, because the sluggish economy has chilled expansion plans. Some say the federal money isn't worth it because they fear it will come with too much regulatory oversight.

"We have taken a strategic decision not to have our primary regulator, the government, also be a partner in our bank," said William Chase Jr., CEO of Triumph Bank in Memphis.

Chase said the bank already has enough capital to meet the paltry demand for loans. "Our business customers are mired in uncertainty and are reluctant to invest in their businesses," Chase said.

The new federal solution awaits Obama's signature.  It's perfect, as government solutions go.  It addresses a non-existent problem.  There is no clogged credit pipeline, but there won't be much new lending because there is no demand, and there is no demand because of the regulatory disruptions brought about by reform – health care reform, financial reform, TARP. 

Not to worry, though.  Whatever happens the new legislation is already another Obama success story. 

Financial Reform -- an Unintended Consequence

According to the Wall Street Journal a line inserted into Dodd-Frank by congresswoman Mary Jo Kilroy, a Democrat from Ohio, brought an abrupt halt to the issue new asset backed securities.

Witness last week's land speed record for unintended consequences, as a liability provision in the Dodd-Frank financial reform brought new issues to a screeching halt in the $1.4 trillion asset-backed securities market.

These securities are bonds backed by auto loans, credit-card receivables and the like. Shutting down this entire market to new offerings was an amazing Congressional feat, given that the same federal government has put tens of billions of taxpayer dollars at risk to revive the same market.

That line in Dodd-Frank removes an exemption for credit rating agencies like Standard & Poor's and Moody's.  Ms. Kilroy's intent was to increases their potential liability.

The financial genius behind this section of Dodd-Frank is Representative Mary Jo Kilroy. The Ohio Democrat inserted a line in the bill that removes the exemption for credit raters like Standard & Poor's and Moody's from being considered "expert" advisers in judging securities offerings. This makes them closer to underwriters or accountants in vouching for an issued security, and it means that their consent is required before their ratings can be included in a registration statement filed at the Securities and Exchange Commission.

[...]

Both S&P and Moody's cited this enhanced liability in announcing that they would not consent to participating in SEC asset-backed securities registrations. Fitch, DBRS and others followed suit.

On July 22nd the SEC staff announced that they would suspend enforcement for six months, at which point market activity resumed, at least temporarily.  But the WSJ expects there are plenty more such unintended consequences where that one came from.  How's that Recovery Summer going?

The Practical Effect of Financial "Reform"

A Wall Street Journal editorial column on the effects of Dodd-Frank notes that a summary describing the bureaucratic mess the bill creates takes up more than 150 pages.  The summary was prepared by the law firm of Davis Polk & Wardwell.  It takes only a couple of paragraphs to identify the real beneficiaries of financial "reform."

Because Congress abdicated its responsibility to set clear rules of the road, the lobbying will only grow more intense after the President signs Dodd-Frank. According to the attorneys, "The legislation is complicated and contains substantial ambiguities, many of which will not be resolved until regulations are adopted, and even then, many questions are likely to persist that will require consultation with the staffs of the various agencies involved."

In other words, the biggest financial players aren't being punished or reined in. The only certain result is that they are being summoned to a closer relationship with Washington in which the best lobbyists win, and smaller, younger firms almost always lose. New layers of regulation will deter lending at least in the near term, and they are sure to raise the cost of credit. Non-blue chip businesses will suffer the most as the financial industry tries to influence the writing of the rules while also figuring out how to make a buck in the new system.

Yet another exercise in stimulating the Washington, DC economy.

Dodd-Frank - No One Knows How It Will Work

Congress has agreed upon financial reform legislation, but the bills leading sponsor doesn't know how it will work. Only that it's good.

"It's a great moment. I'm proud to have been here," said a teary-eyed Sen. Christopher J. Dodd (D-Conn.), who as chairman of the Senate Banking Committee led the effort in the Senate. "No one will know until this is actually in place how it works. But we believe we've done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done."

Both the House and Senate must approve the compromise legislation before it can go to Obama for his signature.

I suppose it's an improvement over health care reform, which congress had to pass before they could find out what was in it.  At least this time they know what's in it.  They just don't understand what it means. 

Yippee.  When reform passes congress will have let loose a bureaucracy that will have nearly unlimited power.  Let's pause now and ponder, what will it do with that power?

A new consumer protection bureau housed in the Federal Reserve would have independent funding, an independent leader and near-total autonomy to write and enforce rules. The government would have broad new powers to seize and wind down large, failing financial firms and to oversee the $600-trillion derivatives market. In addition, a council of regulators, headed by the Treasury secretary, would monitor the financial landscape for potential systemic risks.

Bureaucratic legislation!  Lobbyists, lawyers, and congressmen must be salivating at the prospect of huge financial firms lining up with their political action cash.  And what large financial firm won't be thrilled at the chance to influence rule writing in ways that will shield it from any meaningful competition.  Call it the cost of doing business.  In the best case scenario we will see yet another round of regulatory capture where the regulated industry writes its own rules  What we won't see out of this is any reduction in the systemic risk nor any economic stability.

"This legislation is a failure on both counts," Sen. Judd Gregg (R-NH) said in a statement that denounced the compromise as failing to address "shoddy underwriting practices" or problems with the government-sponsored entities Fannie Mae and Freddie Mac. "It will not encourage much-needed stability and confidence in our financial markets. It will not significantly reduce systemic risk in our financial sector."

What it will do is generate more special interest money that will flow through lobbyists into political campaign war chests.  This is what you get with progressive government.

It's a Disaster

That's New Hampshire Senator Judd Gregg's take on the financial reform bill that just passed the Senate.  It's an assessment he shared during an appearance on CNBC. The financial regulatory bill is a “disaster,” and its proposed consumer protection agency would create a Fannie and Freddie “on steroids,” Sen. Judd Gregg, R-N.H. told CNBC on Monday. “The bill is a disaster because it doesn’t address the fundamental underlining causes of the economic issue, which were real estate and underwriting,” he said. “This bill became, ‘I want to score the most points against Wall Street.’ Most of the initiative of this bill wasn’t directed at solving the problem, but it was directed at scoring political points.”

Speaking about the new consumer protection agency Gregg said, “It’s going to become an agency that defines lending on social justice purposes instead of safety and soundness purposes.”

Financial Reform - The Point of It All

In his pursuit of financial reform President Obama is sticking to the game plan:  Never let a good crisis go to waste.  As the legislation stands right now, we can expect to get a new layer of regulators – a Financial Stability Oversight Council that is going to be able to make up laws as it goes along.

If you think the lobbying is intense while Congress considers financial reform legislation, wait until the President signs it. That is when the real battle will begin to shape the new rules of Wall Street.

The unifying theme of the Senate bill that passed last week and the House bill of last year is to hand even more discretion and authority to the same regulators who failed to foresee and in many cases created the last crisis. The Democrats who wrote the bill are selling it as new discipline for Wall Street, but Wall Street knows better. The biggest banks support the bill, and the parts they don't like they will lobby furiously to change or water down.

Big Finance will more than hold its own with Big Government, as it always does, while politicians will have more power to exact even more campaign tribute.

That's the goal.  More power to attract more campaign money.  Nothing gets fixed.

Scott Brown - Rube

TEA Party favorite Scott Brown provided the deciding vote to end debate on the Senate Wall Street reform bill, thus allowing its passage.  So much for the folks who put him in office.  The current stock market plunge may be the key indicator of how well conceived and well received these new financial regulations will be.  We're in for a new era of crony capitalism.

Yesterday the Senate, including three Republicans, voted to shut off debate on the bill. This all but ensures that ill-conceived financial regulations will become law.

The only good thing to come from this spectacle is that it shows the business community and American voters that the Democratic Party—despite the moderate face of the Obama presidential campaign—has not outgrown their New Deal mentality. Democrats are still the party of government and the special interests that cling to it.

The root of the financial crisis was, and still is, in government housing policies.  Yet there is nothing in bill that addresses the issue, nor is there anything to discourage more and more losses by Fannie Mae and Freddie Mac that will require more and more taxpayer bailouts.

Thank you so much, Scott Brown.  Brown sought to carve out exemptions for Massachusetts financial companies, and so he was open to a deal in which he was one of three Republicans to vote in favor of ending debate.

Mr. Brown was concerned that companies such as State Street Corp., Fidelity Investments, and Massachusetts Mutual Life Insurance Co., because of the large amount of assets they manage, could face restrictions similar to the curbs placed on big Wall Street banks.

Sen. Brown wanted assurances from someone that his concerns would be addressed before the bill became law.

On Wednesday night, House Financial Services Committee Chairman Barney Frank (D., Mass.) was on the elliptical machine at the House of Representatives gym when Mr. Brown called.

"'Can you assure me you are going to fight for this?"' Mr. Brown asked Mr. Frank, according to Mr. Frank. "I said 'Sure."'

Nice job, Scotty.  You got a promise in exchange for your vote.  But will he respect you in the morning?

Reform That Gets to the Heart of It

There is hope, slim though it may be, that financial reform will actually reduce the chances of another housing market meltdown.  GOP Senators John McCain, Richard Shelby and Judd Gregg introduced a reform amendment that addresses the risks posed by Fannie Mae and Freddie Mac.  Let's see what the Democrats do about it.

The Financial Crisis Inquiry Commission spent yesterday focusing on financial "leverage," using Bear Stearns as an example. But Fannie and Freddie were twice as leveraged as Bear, and much larger as a share of the mortgage market. Fan and Fred owned or guaranteed $5 trillion in mortgages and mortgage-backed securities when they collapsed in September 2008. Reforming the financial system without fixing Fannie and Freddie is like declaring a war on terror and ignoring al Qaeda.

According to the Wall Street Journal Freddie Mac lost $8 billion in the first quarter of this year.  Fannie and Freddie lost a combined $126.9 through the end of 2009.  This makes them bigger losers in the financial crisis than even AIG and Citigroup – so big in fact that the Obama administration won't include their losses in the federal budget because of the impact on the deficit. 

It's not as if the administration isn't aware that there's a problem.  Last Christmas Eve it raised the $400 billion cap on Fannie's and Freddie's potential taxpayer losses, giving the two a virtual blank check.  That doesn't imply that Democrats have any plans to rein them in, so the GOP amendment offers a glimmer of hope.

The virtue of Mr. McCain's amendment is that it will give Senators a chance to vote on the kind of reform that Congress blocked for so long, notably with Senator Barack Obama helping the blockade. The amendment mandates that the current government conservatorship of Fan and Fred will end within 30 months. In the meantime, the companies will have to reduce their mortgage portfolios by 10% each year. If the terrible twosome can't stand on their own after conservatorship, they would then go into receivership and be liquidated.

If they can survive on their own, they would have three years before the expiration of their federal charters, during which time they would have new operating restrictions. Messrs. McCain, Shelby and Gregg would repeal the affordable housing goals previously legislated for Fan and Fred and which contributed to their terrible mortgage bets, and the companies would have to reduce the mortgage assets held on their books by nearly 50% within two years and raise their capital standards.

Fannie and Freddie would also have to start paying state and local sales taxes, lose their exemption from full registration at the Securities and Exchange Commission when they issue securities, and start paying fees to repay the taxpayer for the value of federal guarantees. The $400 billion limit on taxpayer assistance would be reinstated, and for as long as they are in federal conservatorship or receivership, they would have to be included in the federal budget.

In short, the McCain amendment precisely targets the problems that caused the mortgage crisis: If the housing giants are no longer subsidized, they will become small enough to fail. That means they will stop lending money to people who cannot afford to pay them back, and in turn they will stop endangering taxpayers.

I'll be shocked if Democrats actually go along with it.  Their talk of ending bailouts is just that - talk.  It's not certain that Senate Majority Leader Harry Reid will even allow a vote on the amendment.  For Democrats reform is really about giving politicians greater control over financial companies – and the contributions that flow from them.