AMERICAN CONSERVATISM IN 2008 AND BEYOND

http://www.citizenjoe.org/node/125
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What's the fuss?
In 2003, both Fannie Mae and Freddie Mac found themselves in hot water when the feds accused them of improper accounting - in the $9 billion range. This led to the resignation of both the chief executive of Fannie Mae, Franklin Raines, and chief financial officer of Freddie Mac, Timothy Howard.

As if that financial hanky-panky wasn't enough to worry lawmakers, some economists warn that Fannie and Freddie deserve special attention because of the shaky ground they sit on. Here's the idea: those economists say Frannie and Freddie do as well as they do because, although they're not government agencies, the market treats them like they're part of the government. Everyone knows that if Frannie and Freddie crumble, the feds will bail them out. That makes it safer to dole out riskier mortgages - but it also creates a mini housing bubble of sorts. In other words, the feds will probably rescue Fannie and Freddie if they crash, but knowing that the feds will do so increases the chances of creating a market bubble that will make them crash. (See this Washington Post article for more on their unique status and risk.)

To make sure Freddie and Fannie didn't go the way of Savings & Loans (the 80's Enron, which got bailed out by the feds), lawmakers are pushing a plan to give regulators more power to keep the GSEs on financial firm ground
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18 January 2008
U.S. Economy Is Fundamentally Strong, President Says

Short-term stimulus package designed to stave off a downturn

Washington -- President Bush and Federal Reserve Chairman Ben Bernanke have emphasized to world economic markets that the U.S. economy remains fundamentally resilient and concerns about a slowdown in growth could be ameliorated by a short-term stimulus package.

"[The U.S. economy] has a strong labor force, excellent productivity and technology, and a deep and liquid financial market that is in the process of repairing itself. So I think we need to keep in mind also that the economy does have inherent strengths and that those will certainly surface over a period of time," Bernanke said during testimony before the U.S. House Budget Committee January 17. Periodically during the year, Bernanke testifies before Congress on the current economic outlook and future trends.

Coinciding with Bernanke's remarks about the continuing strength of the U.S. economy, President Bush announced January 18 that he is asking Congress for a short-term economic stimulus package to help avoid a slowdown in the economy and to help reassure world markets he is prepared to act swiftly.

"Our economy has a solid foundation, but there are areas of real concern. The economy is still creating jobs, though at a reduced pace. Consumer spending is still growing, but the housing market is declining. Business investment and [trade] exports are still rising, but the cost of imported oil has increased," Bush said in a televised White House address.

The proposed $140 billion stimulus package Bush is seeking amounts to about 1 percent of the gross domestic product, and it temporarily will be offering rapid business and consumer incentives, but not long-term tax increases. Bernanke told Congress that he also supports a short-term stimulus package, but he warned that it should not carry any long-term impact that could hamper growth later or worsen the U.S. federal deficit.

The U.S. economy has been buffeted by a housing crisis, credit crunch and surge in oil prices. And since last summer, Bernanke said in testimony, financial markets in the United States and in a number of other industrialized countries have been "under considerable strain."

Treasury Secretary Henry Paulson, who will lead the effort before Congress for the stimulus package, told NBC News that "the long-term fundamentals of our economy are strong," but "[w]e believe the economy is going to continue to grow slowly here."

Paulson said "this is not an emergency." The president is very focused on taking actions quickly that will give a boost to the economy as soon as possible this year, he said.

The U.S. economy grew at about 5 percent in the third quarter, Paulson said, though the signals are mixed now and there is some slowing of the growth rate.

Bush spoke with congressional leaders by conference call January 17, and all agreed to a short-term stimulus package that can be ready for his signature within a week to 10 days. The White House said in a fact sheet that "a growth package can help ensure that consumption and investment is sufficient to protect the health of the broader economy."

A fact sheet on the president’s stimulus plan is available on the White House Web site. The full text of Bernanke’s statement to the House Budget Committee, as prepared for delivery, is available on the committee Web site.

[Codified to 12 U.S.C. 2902]

[Source: Section 803 of title VIII of the Act of October 12, 1977 (Pub. L. No. 95--128; 91 Stat. 1147), effective October 12, 1977; as amended by section 1502 of title XV of the Act of November 10, 1978 (Pub. L. No. 95--630; 92 Stat. 3713), effective November 10, 1978; and sections 744(q) of title VII and 1212(a) of title XII of the Act of August 9, 1989 (Pub. L. No. 101--73; 103 Stat. 440 and 526, respectively), effective August 9, 1989]

SEC. 804. (a) IN GENERAL.--In connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall--
(1) assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution; and
(2) take such record into account in its evaluation of an application for a deposit facility by such institution.
(b) MAJORITY-OWNED INSTITUTIONS.--In assessing and taking into account, under subsection (a), the record of a nonminority-owned and nonwomen-owned financial institution, the appropriate Federal financial supervisory agency may consider as a factor capital investment, loan participation, and other ventures undertaken by the institution in cooperation with minority- and women-owned financial institutions and low-income credit unions provided that these activities help meet the credit needs of local communities in which such institutions and credit unions are chartered.

U.S. Economy Is Fundamentally Strong, President Says

The frightening thing is that the government is now attempting to do all the wrong things to repair the damage and, so far as I know, has not yet addressed the core of the problem that started it.

* economy


Paul Krugman praises President Obama's new budget proposal
By John Amato Saturday Feb 28, 2009 7:00pm

Paul Krugman's latest column praises President Obama's new budget big-time. I haven't seen Paul that excited in a long while.

Elections have consequences. President Obama’s new budget represents a huge break, not just with the policies of the past eight years, but with policy trends over the past 30 years. If he can get anything like the plan he announced on Thursday through Congress, he will set America on a fundamentally new course.

The budget will, among other things, come as a huge relief to Democrats who were starting to feel a bit of postpartisan depression. The stimulus bill that Congress passed may have been too weak and too focused on tax cuts. The administration’s refusal to get tough on the banks may be deeply disappointing. But fears that Mr. Obama would sacrifice progressive priorities in his budget plans, and satisfy himself with fiddling around the edges of the tax system, have now been banished.For this budget allocates $634 billion over the next decade for health reform. That’s not enough to pay for universal coverage, but it’s an impressive start. And Mr. Obama plans to pay for health reform, not just with higher taxes on the affluent, but by putting a halt to the creeping privatization of Medicare, eliminating overpayments to insurance companies.
{snip}

And even if fundamental health care reform brings costs under control, I at least find it hard to see how the federal government can meet its long-term obligations without some tax increases on the middle class. Whatever politicians may say now, there’s probably a value-added tax in our future.But I don’t blame Mr. Obama for leaving some big questions unanswered in this budget. There’s only so much long-run thinking the political system can handle in the midst of a severe crisis; he has probably taken on all he can, for now. And this budget looks very, very good.

Tags: Economy, Paul Krugman

AIG near deal on new terms of U.S. bailout: source


NEW YORK (Reuters) " American International Group Inc is close to a deal with the U.S. government that would ease the terms of its bailout, give a further equity commitment and help it pay down debt, a person familiar with the matter said on Saturday.

The board of the troubled insurer is due to meet on Sunday to vote on the deal, which could be announced when AIG reports its quarterly results on Monday.

The revised agreement is expected to include an additional $30 billion equity commitment from the government, more lenient terms on an existing preferred investment, and a lower interest rate on an existing $60 billion government credit line, the source said.

AIG will also give the Federal Reserve ownership interests in its Asia-based American Life Insurance (Alico) and American International Assurance Co (AIA) units, the source said.

AIG, once the world's largest insurer, is also expected to post a roughly $60 billion quarterly loss, hurt in large part by writedowns on certain tax assets and commercial mortgage backed securities, the source said.

AIG declined to comment.

(Reporting by Paritosh Bansal; Editing by Eric Walsh)

When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: “regulatory arbitrage” and “ratings arbitrage.” The word “arbitrage” usually means taking advantage of a price differential between two securities " a bond and stock of the same company, for instance " that are related in some way. When the word is used to describe A.I.G.’s actions, however, it means something entirely different. It means taking advantage of a loophole in the rules. A less polite but perhaps more accurate term would be “scam.”

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These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. “It was a way to exploit the triple A rating,” said Robert J. Arvanitis, a former A.I.G. executive who has since become a leading A.I.G. critic.

Why would Wall Street and the banks go for this? Because it shifted the risk of default from themselves to A.I.G., and the AAA rating made the securities much easier to market. What was in it for A.I.G.? Lucrative fees, naturally. But it also saw the fees as risk-free money; surely it would never have to actually pay up. Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets " housing " could only go up in price.

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At its peak, the A.I.G. credit-default business had a “notional value” of $450 billion, and as recently as September, it was still over $300 billion. (Notional value is the amount A.I.G. would owe if every one of its bets went to zero.) And unlike most Wall Street firms, it didn’t hedge its credit-default swaps; it bore the risk, which is what insurance companies do.

It’s not as if this was some Enron-esque secret, either. Everybody knew the capital requirements were being gamed, including the regulators. Indeed, A.I.G. openly labeled that part of the business as “regulatory capital.” That is how they, and their customers, thought of it.

There’s more, believe it or not. A.I.G. sold something called 2a-7 puts, which allowed money market funds to invest in risky bonds even though they are supposed to be holding only the safest commercial paper. How could they do this? A.I.G. agreed to buy back the bonds if they went bad. (Incredibly, the Securities and Exchange Commission went along with this.) A.I.G. had a securities lending program, in which it would lend securities to investors, like short-sellers, in return for cash collateral. What did it do with the money it received? Incredibly, it bought mortgage-backed securities. When the firms wanted their collateral back, it had sunk in value, thanks to A.I.G.’s foolish investment strategy. The practice has cost A.I.G. " oops, I mean American taxpayers " billions.