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OpenMarket: Banking and Finance

  • Bailout fails -- Move on to Mark-to-Market Reform

    September 29, 2008 3:23 PM

    Oh, Happy Day! And it certainly is for all those who value freedom, responsibility and the true free market in which individuals are free to profit from their risks on the condition that they don't stick the rest of us with their losses.

    It's not hyperbole to say the Republican and Democratic backbenchers who defied both parties' leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that America is much less likely to turn into France, Venezuela, or the old Soviet Union, as this bailout/nationalization package would have set us on the road to becoming.

    Several great speeches on the Right and Left were given. Democrats Brad Sherman of California and Earl Blumenauer of Oregon gave powerful speeches against corporate giveaways. And conservative leaders of the Republican Study Committee -- such as Jeb Hensarling, Jeff Flake, Mike Pence, and of course Ron Paul -- spoke about how government intervention was largely the cause of this predicament, but the bailout would doom arguments for the free market form here on out. The idea of the government making this kind of outlay to high-flying risk takers just didn't jibe with members, and certainly not with the American people.

  • Investing in Communal Failure: The Current Economic Crisis as a Result of Regulation

    September 29, 2008 2:47 PM

    Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn't irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.

    Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution's short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.

    As I noted in my paper The Community Reinvestment Act's Harmful Legacy, one of the effects of the CRA was the creation of a weapon that has been effectively utilized to extort money from lenders. When lending institutions wish to open a new branch, expand, or merge, they must apply for permission from one of the four governing bodies (Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision). Their request can be postponed or outright denied if any community group files a CRA protest. Lending institutions can of course fight these protests, but CRA investigations can take months and cost large sums of money.

  • Stocks Climb as House Rejects Bailout

    September 29, 2008 2:19 PM

    Though the bill may have been defeated for the wrong reasons—like the lack of freebies, giveaways, and handouts that many on the left had hoped for—the defeat of the bailout bill in the House has brought stocks out of their decent. The Dow Jones is now climbing.

    But how can this be? How could a bill that was designed to save our economy, our country, and the world be the cause of the Dow's drop today? Easy, the bill was introducing such incredible uncertainty into the market that investors were panicking.

    It could also be that Wall Street—despite the recent bank closings—is still smarter than Washington. The reactions of investors suggests they realize the bill may have done more harm than good.

    For more on why a defeated bailout bill is a very good thing and why the world doesn't need saving, read John Berlau in today's American Spectator.

    Stay tuned to OpenMarket for John Berlau's reaction to the bailout bill's defeat. Also, check out our Bailout Watch page at

  • BREAKING NEWS: Bailout Vote Fails in House

    September 29, 2008 2:13 PM

    The House of Representatives just voted down the $700 billion corporate finance bailout, despite earlier urging from President Bush to push the measure through. Look for in depth analysis from our very own John Berlau and the rest of the policy team as the day progresses. Read CEI's roundup of the continuing finance crisis (and sign up for email updates) here.

    NEW: John Berlau responds (and speaks!) in reaction to today's vote. Updated post and audio clip here.

  • Bailout Bill Just Got Worse, But Congress May Approve It Without Reading It, Based on Misleading Claims

    September 29, 2008 10:53 AM

    The bailout bill has been larded up with additional welfare that will increase its cost, but the House will likely approve it today without even reading the bill, which had already expanded to more than 100 pages last night.  Worse, some conservative lawmakers may vote for it based on the misleading claim that it contains no welfare for delinquent and defaulting borrowers who are now facing the consequences of years of living beyond their means.

    The Associated Press, which didn't bother to read the bill before reporting on it, claimed today that "not in the bill" is "help for troubled homeowners."  (See Martin Crutsinger, Associated Press, “Rescue Bill Includes More Oversight, Insurance Option," Washington Examiner, Sept. 29, 2008, at page 14).  In reality, the bill includes provisions that allow some irresponsible borrowers to get not only their interest but also their principal reduced, and that expand a government program that helps defaulting borrowers cut their mortgage payments.  But the Washington Examiner, which wisely opposed larding up the bailout bill, has today reluctantly come out in favor of the bailout as a necessary evil, after reporting on page 1 that the "$700B bill contains no" welfare for defaulting borrowers.  (The Examiner earlier chronicled how government handouts and regulations helped spawn the mortgage crisis). 

  • Bailouts to local govts and also foreign authorities

    September 29, 2008 10:42 AM

    Andy McCarthy on National Review's Corner points out,

    The scheme "[a]llows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families."So in addition to rewarding irresponsible lenders and borrowers, we taxpayers are now to be "protected" by buying the toxic debt of states, cities and municipalities.  It's one thing to throw a life-line to the credit industry; local governments, by contrast, have the ability to cut spending drastically or raise taxes if their inhabitants want government services.

    Did Andy also notice Section 112 in Sunday's draft (emphasis mine) ?: "To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending finances to financial institutions that have failed or defaulted on such financing, such assets qualify for purchase under Section 101."

    Just wait until the voters catch these particulars. They'll take their revenge on whoever signs this saying, "Throw the bums out!"

  • $700 billion to worsen economy? -- Berlau in American Spectator

    September 29, 2008 9:54 AM

    Here are excerpts from my story in today's American Spectator Online on how the $700 billion bailout could actually make things worse -- in terms of resulting inflation and even a further contraction in credit due to the government purchases' interaction with the mark-to-market accounting rules. To read the piece in its entirety, click here.

    ""The government has to do something to keep markets from falling and the economy from getting worse." How many times have you heard that mantra this past week from President Bush, Treasury Secretary Hank Paulson, Democrat leaders, the news media, and even some ostensibly conservative periodicals?

    But what if the bailout, as originally proposed and in its latest incarnation, would spend $700 billion of taxpayers' money and actually make the economy worse? Believe it or not, there is good evidence this may happen. The inflationary prospects of the bailout price tag may lead to spikes in oil and crop prices that could hit ordinary Americans in their cars and on their kitchen tables. And government purchases of financial assets could ironically further constrain credit through causing write-downs on even the balance sheets of financial firms not participating in the bailout by worsening the effects of mark-to-market accounting rules.

    All last week, the stock market's plunging downward was pointed to as a sign that Washington must step up to the plate -- as quickly as possible. Yet ironically last Friday -- the day after the bailout talks broke down at the wild White House meeting with the presidential candidates -- the Dow Jones industrial average actually went up by 120 points! This doesn't mean that the market is opposed to the bailout, but it does show that the market volatility is probably as much due to the potential effects of a bailout as it is to a lack of one."

  • Hurry up with that exchange

    September 29, 2008 6:48 AM

    Credit default swaps remain a large part of this financial crisis, with some analysts crediting the failures in the $58 trillion market as more important than mortgage-related ones. According to IBD, "Counterparty risk was at the heart of the problems that sent Bear Stearns, Lehman and AIG spinning helplessly down the drain. Investors not only worry about their counterparties, but their counterparties counterparties."

    In several weeks, though, CME, formed from the merger of the Chicago Board of Trade and the Chicago Mercantile Exchange, will launch exchange-based trading for credit default swaps. A clearinghouse is also being planned by Clearing Corp., which is owned by 17 financial players including Goldmans and Citigroup and UBS.  According to IBD,

    Clearinghouses like those planned by CME Group and the Clearing Corp. address counterparty risks by centralizing the counterparty functions. Instead of a credit protection buyer negotiating individually with the seller, a clearinghouse would act as the counterparty to both buyer and seller. It would guarantee bond payment to the protection buyer. And it would collect payments for the insurance. The clearinghouse also would hold collateral for the contracts and set minimum standards...

    Since credit default swaps are now negotiated over-the-counter, standards on such basics as collateral vary widely. "Everyone is different in their requirements," said Backshall.

    And leverage reached outrageous levels. Many counterparties were leveraged 20-30 times, again heightening the risk of default.

  • Beachcombing on the Bailout

    September 26, 2008 11:50 AM

    Here are a few treasures I found this morning:

    Kathryn Jean Lopez on National Review Online points out that some of the 20% of the profits (a floor) recovered from the bailout would go to voter-fraud-ACORN!!!   (See Hans's post below and here and here and here on ACORN.) (A commenter notes that if most purchases lose money but one makes money, the taxpayers eat the losses while the slush fund gets the profits.)

    John Paulson, not to be confused with the former Goldman CEO, suggests in today's WSJ that the government buy preferred stocks of failing companies, as they did with Chrysler, AIG, and Fannie and Freddie. “Invest the $700 billion of taxpayer money in senior preferred stock of the troubled financial institutions that pose systemic risks. Let's call this the "Preferred plan." In fact, it is the Fannie Mae and Freddie Mac model -- which the Treasury Department has already endorsed and used in practice. It is also the approach Warren Buffett used for his investment in Goldman Sachs.” Clean and simple, but doesn't benefit the other Paulson's friends.

  • Bailout Bill Drafted by Senator Dodd Is a Scam on Taxpayers to Bankroll Left-Wing Extremists

    September 26, 2008 10:34 AM

    The $700 billion bailout of the financial system just got worse, thanks to a rewrite by Senate banking committee chairman Chris Dodd.  If the government loses money on all the "bad debt" it's buying, the taxpayers will pick up 100% of the tab.  But if markets rebound, or the government makes money on any of its individual purchases, taxpayers won't keep the money.  Instead, at least 20 percent of it will go into a housing slush fund that will benefit the left-wing group ACORN, which pressured lenders to make the risky sub-prime mortgage loans that spawned the mortgage crisis.  (Even though housing subsidies and mandates caused the mortgage bubble in the first place).

    ACORN practices widespread voter fraud to increase liberal turnout in elections, and is guilty of financial fraud and embezzlement, but it has avoided any punishment due to its links to liberal lawmakers like Senator Chris Dodd, Congressman Barney Frank, and Senator Charles Schumer.  ACORN is engaged in massive fraud in battleground states like Florida.  (Election rules are being shredded for partisan purposes in other battleground states like Virginia and Ohio).

    Other welfare has been added to the bailout to appease liberal lawmakers -- the very lawmakers who blocked any reform of the government-sponsored mortgage giants, Fannie Mae and Freddie Mac, which encouraged the risky lending that spawned the financial crisis (Fannie Mae engaged in extensive accounting fraud to benefit its crooked former executives.  Yet they remain influential liberal powerbrokers).


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