Bailouts and Investigations
[Guest post by DRJ]
While the lawmakers on Capitol Hill angrily debate the $700B bailout, the FBI has opened investigations into the 4 institutions that helped make the bailout necessary:
“Two law enforcement officials said the FBI is looking at potential fraud by mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE), Lehman Brothers Holdings Inc. (LEH), and insurer American International Group Inc. (AIG)
A senior law enforcement official says the inquiries, still in preliminary stages, will focus on the financial institutions and the individuals that ran them.”
There may have been no laws broken here but these investigations could help those like Senator Christopher Dodd who worry “the authors of this calamity” will walk “with the usual golden parachutes while taxpayers pick up the bill.”
Secretary Paulson shared the lawmakers’ anger and exasperation but reiterated that the proposed rescue plan is designed to benefit taxpayers, not “fat-cat Wall Streeters.” I agree with Secretary Paulson. Letting the US financial markets crash plunge in order to punish a few Wall Street executives is like cutting off your nose to spite your face. It won’t make US investors (most of whom are also taxpayers) feel better when their investments decline to pennies on the dollar that Wall Street was punished, too.
So these companies and CEOs may spend years dealing with and worrying about federal investigations of their actions. And let the rest of us avoid the turmoil that will surely result if there is no bailout.
— DRJ
Shouldn’t Senator Dodd be one of the first investigated? Was he just the piano player in the whorehouse?
Perfect Sense (9d1b08) — 9/23/2008 @ 5:21 pmWhat better way to prod recalcitrant execs holding the deal hostage until their parachutes are secured?
Since all three senators in the presidential race are on record as potentially supporting the bailout, but absolutely no money can go the these execs’ retirement plans, I suspect that’s what’s going on. “Hold up this deal,OK…you’ll spend the rest of your life talking to congressional committees and the FBI and paying your legal bills.”
While they’re at it, they should investigate Sen. Dodd, too.
driver (56cdca) — 9/23/2008 @ 5:26 pm“And let the rest of us avoid the turmoil that will surely result if there is no bailout.”
Really, what is the turmoil that will surely result?
How much worse can it be than $700 billion? (and that’s just the opening bid)
Count me in the not yet convinced how bad it could be.
Let them sink. We’ll recover.
jharp (f4bed7) — 9/23/2008 @ 5:31 pmI take it you don’t own any stocks, bonds, mutual funds, or have a pension? And that you don’t have any relatives who own those assets either? And, finally, you must not do business with anyone who relies on financial markets for capitalization or credit. Because that’s the “them” you want to let sink.
DRJ (c953ab) — 9/23/2008 @ 5:35 pmDRJ – Letting the US markets crash in order to punish a few Wall Street executives
They’re the legislature. I’m sure they can manage one without the other.
If they wanted to.
Of course, it wasn’t only the Wall Street Execs who profited, was it.
Therein may lie the problem with this deal – opening the cookie jar may expose more hands than some would like.
Apogee (366e8b) — 9/23/2008 @ 5:37 pm“I take it you don’t own any stocks, bonds, mutual funds, or have a pension?”
Not much. Never have trusted them.
“And that you don’t have any relatives who own those assets either?”
Some but not a significant portion of their assets. I think we saw it coming many r years ago. In my opinion the valuations of most stocks is widely too high, even today.
“And, finally, you must not do business with anyone who relies on financial markets for capitalization or credit. Because that’s the “them” you want to let sink.”
It does affect my business and it is a real shame for those who gambled and lost.
But I’m not interested in paying for their losses.
jharp (f4bed7) — 9/23/2008 @ 5:44 pmCause of that recession was the overinflated value of real estate which banks used as basis for their assets to loan with.
And a reluctance to allow certain banks to fail, in an attempt to save face.
However, that’s not exactly what this is, as the government in Japan didn’t receive any assets for their bailouts.
The whole world is watching, because the world economy will also be affected severely if this country does not handle this crisis well.
Apogee (366e8b) — 9/23/2008 @ 5:45 pmI replied to a comment and it disappeared.
It’s a conspiracy.
Apogee (366e8b) — 9/23/2008 @ 5:46 pmApogee,
So did I. Ghosts in the machine I suppose…
voiceofreason2 (001e60) — 9/23/2008 @ 5:48 pmAnd I might add those who have been in the market have profited very very nicely over the past 30 years. It’s just they held too long.
Same old script, different characters. The careless and reckless get destroyed, some gamblers win but most lose. And a few profit immensely.
jharp (f4bed7) — 9/23/2008 @ 5:49 pmWow, jharp. Except for the political orientation, you could be my next door neighbor. Small world, isn’t it?
DRJ (c953ab) — 9/23/2008 @ 6:02 pmCNBC interviewed a former member of the Federal Reserve Board, who told a story about his grandfather who immigrated to NYC from Eastern Europe in the early 20th century. Grandfather was a peddler and eventually was able to open a shop — an Army/Navy Surplus store. The story is that when the market crashed in 1929 his reaction was, “Good, the millionaires got what was coming to them.” Within a year he was broke and lost his store.
DRJ is correct; as crappy as it is there is no alternative.
capitano (211a15) — 9/23/2008 @ 6:03 pmVOR2,
I found your comment in the filter but it won’t let me approve it. I’m sure it’s something to do with the software and nothing about your comment, and I’m reprinting it here:
DRJ (c953ab) — 9/23/2008 @ 6:05 pmIf the financial system becomes illiquid, and the credit markets shut down; World Trade shuts down; Interstate Trade shuts down, and the corner gas-station will start demanding cash for a fill-up, and the banks won’t have any.
Another Drew (e8be76) — 9/23/2008 @ 6:06 pmThat is what happens in a panic!
If a company is so big we collectively need to rescue it, it should go right through the slicing procedures that the ATC uses. The top 100 executives get subpoenas and pink slips. The subdivisions of the original company get whatever bailing is needed and a short grace period.
If you’re “too big to be allowed to fail” then your just too damned big.
Al (b624ac) — 9/23/2008 @ 6:11 pmWow, jharp. Except for the political orientation, you could be my next door neighbor. Small world, isn’t it?
Comment by DRJ — 9/23/2008 @ 6:02 pm
Not sure when it comes down to it our politics aren’t that much different.
We just have a different idea of where the enemy ranks.
Mt ranking.. is big business, republicans, democrats.
jharp (f4bed7) — 9/23/2008 @ 6:21 pmTypical Democrats, happy to destroy the American economy in the interests of their own personal power. jharp fits right in.
SPQR (26be8b) — 9/23/2008 @ 6:43 pmTypical Democrats, happy to destroy the American economy in the interests of their own personal power. jharp fits right in.
Comment by SPQR — 9/23/2008 @ 6:43 pm
No. I’m a free market guy.
Let the gamblers pay for their own losses.
I have yet to be convinced it will be worse without a bailout.
jharp (f4bed7) — 9/23/2008 @ 6:48 pmjharp, the crisis was created because of government intervention in the first place. Fannie Mae and Freddie Mac were government interventions. That your position is the product of your personal animosity is evident in all your comments.
SPQR (26be8b) — 9/23/2008 @ 6:53 pmFrom a news story involving Freddie Mac posted earlier this evening on nytimes.com:
One of the giant mortgage companies at the heart of the credit crisis paid $15,000 a month from the end of 2005 through last month to a firm owned by Senator John McCain’s campaign manager, according to two people with direct knowledge of the arrangement.
The disclosure undercuts a statement by Mr. McCain on Sunday night that the campaign manager, Rick Davis, had had no involvement with the company for the last several years.
Interesting story, worth a scan.
Tim McGarry (9fe080) — 9/23/2008 @ 6:56 pmMeaningless, Tim. You are what? the one hundredth to spam that story here. It does not change McCain’s past positions on the issue.
SPQR (26be8b) — 9/23/2008 @ 7:04 pm“Author of calamity” Chris Dodd may not have brains, but has he got chutzpah! Let’s talk Countrywide, CRA, Chris!
He must be pretty secure that the media will not tag him for this debacle.
Patricia (ee5c9d) — 9/23/2008 @ 7:30 pmSPQR,
Seems like the $15,000 a month from Fannie to McCain’s campaign manager does has some legs though, doesn’t it?
Kind of makes the “lipstick on a pig” scandal ridiculously absurd now, doesn’t it?
jharp (f4bed7) — 9/23/2008 @ 7:49 pm… or Barney “there is no crisis” Frank
Harry Arthur (b34c21) — 9/23/2008 @ 7:50 pmjharp, it has legs only for people like you, who work so hard to avoid substance and therefore ignore the actual actions of the candidates.
Like McCain’s call for reform, and Obama’s inaction before and now.
SPQR (26be8b) — 9/23/2008 @ 7:52 pmLike McCain’s call for reform, and Obama’s inaction before and now.
Comment by SPQR — 9/23/2008 @ 7:52 pm
Good one. The dude voted with Bush 90% of time for God’s sake.
Reform? You can’t be serious.
jharp (f4bed7) — 9/23/2008 @ 7:57 pmjharp, that was a great example. It illustrated my point well. You use that silly slogan to insulate yourself from the reality of the current topic. You use it to insulate yourself from having to actually learn about McCain’s actual legislative history – and Obama’s almost complete lack of one.
SPQR (26be8b) — 9/23/2008 @ 7:59 pm*SQUAWK* Voted with Bush 90% of the time. *SQUAWK*
Icy Truth (a6d81b) — 9/23/2008 @ 8:03 pmYou’re funny calling it a “silly slogan” that McCain has voted with Bush 90% of time.
It is also is the truth. So now the truth is simply a silly slogan? Makes sense to me in GOP er world.
jharp (f4bed7) — 9/23/2008 @ 8:07 pmharpie’s gotta work with what he’s got. His own candidate doesn’t have any good points, so his talking point repetoire is limited to lies and smears about the opposition.
daleyrocks (d9ec17) — 9/23/2008 @ 8:08 pmAnd, it was Bush in 2003 that called for reforms in the manner that FM2 operated in relation to the Fed. Gov’t.
Another Drew (e8be76) — 9/23/2008 @ 8:08 pmDRJ,
Thanks for pulling the comment out.
voiceofreason2 (191cac) — 9/23/2008 @ 8:10 pmjharp, its a complete non sequitur in the thread.
Which is a constant tactic of yours. Non sequitur. You can set your watch by how quickly you resort to it. When you’ve had your backside spanked on yet another factual claim, you introduce another irrelevant claim with the weird assertion that it proves your point.
Like this time. McCain could vote with Bush 99% of the time ( whatever the hell that means ), it does not change that McCain urged reform and Obama twiddled his thumbs voting “present”.
SPQR (26be8b) — 9/23/2008 @ 8:11 pmYou gentlemen are ridiculous.
And you seem smart enough that there is no way that you could believe your own bullshit.
The facts are.
McCain voted with Bush 90% of the time.
McCain is running his campaign on “change”.
Get real.
jharp (f4bed7) — 9/23/2008 @ 8:17 pmjharp, no, you are ridiculous. You travel from one logical fallacy to another. Usually demonstrating that you have no command of the issue you are so boldly opining upon.
Like now. The claim was the McCain proposed reform of the GSE’s years ago, and Obama did not.
You introduced the irrelevancy and falsely assert in your incompetence that it rebuts the point.
SPQR (26be8b) — 9/23/2008 @ 8:19 pmNo, SPRQ, the point was..
“Seems like the $15,000 a month from Fannie to McCain’s campaign manager does has some legs though, doesn’t it?
Kind of makes the “lipstick on a pig” scandal ridiculously absurd now, doesn’t it?”
You changed it to McCain is the candidate for change which is utterly absurd.
jharp (f4bed7) — 9/23/2008 @ 8:30 pmIf you ever wonder why you are ridiculed, jharp. This thread is the classic example.
SPQR (26be8b) — 9/23/2008 @ 8:33 pmThe Boys of K-Street would lobby for Satan if he paid them enough. Why do you think they’re referred to as policy whores?
Kind of makes them of the same stripe as lawyers (present company excepted, I hope).
And anyway, jharp, since when does the President cast a vote in the Senate?
I thought the way the system works, is that the President proposes, and the Congress disposes.
Are you trying to tell us that of every proposal that GWB has sent to Capitol Hill since 20 Jan 01, John McCain has supported 90% of them?
Links, Please!
Another Drew (e8be76) — 9/23/2008 @ 8:37 pm““I take it you don’t own any stocks, bonds, mutual funds, or have a pension?”
Not much. Never have trusted them.”
jharp – Thanks for clearing this up. It’s much as I expected and helps explain the extreme ignorance of most of your comments regarding financial matters.
daleyrocks (d9ec17) — 9/23/2008 @ 8:43 pm“jharp – Thanks for clearing this up. It’s much as I expected and helps explain the extreme ignorance of most of your comments regarding financial matters”
Is that right?
I’m feeling pretty smart about my decisions.
I haven’t lost a dime and my assets are in good order.
Yours? You one of the ones begging for a government bailout?
jharp (f4bed7) — 9/23/2008 @ 9:00 pm#21.
Sorry if I was redundant, SPQR, I hadn’t seen the other posts. You’ll note I avoided the word “bombshell.”
Cheers.
Tim McGarry (9fe080) — 9/23/2008 @ 9:38 pmYesterday, Senator John McCain released a television commercial attacking Barack Obama for allegedly receiving advice on the economy from former Fannie Mae CEO Franklin Raines. From the stump, he has recently tried tying Senator Obama to Fannie Mae, as if there is some guilt in the association with Fannie Mae’s former executives.
It is an interesting card for Senator McCain to play, given that his campaign manager, Rick Davis, was paid by Fannie Mae and Freddie Mac several hundred thousand dollars early in this decade to head up an organization to lobby in their behalf called The Homeownership Alliance. …
I worked in government relations for Fannie Mae for more than 20 years, leading the group for most of those years. When I see photographs of Sen. McCain’s staff, it looks to me like the team of lobbyists who used to report to me. Senator McCain’s attack on Senator Obama is a cheap shot, and hypocritical.
Sincerely,
William Maloni
Fannie Mae Senior Vice President for Government and Industry Relations (1983-2004)
What did Rick Davis know and when did he know it? Actually, we already know. Joe just found this little bombshell from earlier this year. Wasn’t so relevant in February when it was written. It is now. McCain’s campaign manager’s previous job was ensuring that Fannie Mae and Freddie Mac didn’t get regulated by the feds:
Davis, was president of the Homeownership Alliance, a Fannie Mae and Freddie Mac-led advocacy group which has tried to fend off regulation sought by large private banks and mortgage lenders.
The front story of the Homeownership Alliance is that it sought to make home ownership affordable to the broadest possible range of people and feared that that this mission would be compromised if Congress stepped in with too many rules.
The back story, according to critics, is that Fannie Mae and Freddie Mac feared that Congressional meddling would lower their healthy profits.
David R (69d23c) — 9/23/2008 @ 11:45 pmIncensed by the advertisements, several current and former executives of the companies came forward to discuss the role that Rick Davis, Mr. McCain’s campaign manager and longtime adviser, played in helping Fannie Mae and Freddie Mac beat back regulatory challenges when he served as president of their advocacy group, the Homeownership Alliance, formed in the summer of 2000. Some who came forward were Democrats, but Republicans, speaking on the condition of anonymity, confirmed their descriptions.
“The value that he brought to the relationship was the closeness to Senator McCain and the possibility that Senator McCain was going to run for president again,” said Robert McCarson, a former spokesman for Fannie Mae, who said that while he worked there from 2000 to 2002, Fannie Mae and Freddie Mac together paid Mr. Davis’s firm $35,000 a month. Mr. Davis “didn’t really do anything,” Mr. McCarson, a Democrat, said.
David R (69d23c) — 9/23/2008 @ 11:49 pmDavid R – I’d love to see what William Maloni’s job description looked like inside Fannie Mae knowing some of their “lobbying” efforts.
daleyrocks (d9ec17) — 9/24/2008 @ 12:16 amWilliam Maloni – 2/08 – the team of lobbyists who used to report to me.
several current and former executives of the companies came forward to discuss the role that Rick Davis, Mr. McCain’s campaign manager and longtime adviser, played in helping Fannie Mae and Freddie Mac beat back regulatory challenges when he served as president of their advocacy group, the Homeownership Alliance, formed in the summer of 2000…Mr. Davis “didn’t really do anything,” Mr. McCarson, a Democrat, said.
The narrative’s getting weak here.
So we’ve got people who worked at the GSE’s, at least before 2004, talking about paying lobbyists to prevent regulation. Who would be worried about regulation?
How about Franklin Raines?
Former Fannie Mae chairman and chief executive Franklin D. Raines has agreed to a multimillion settlement with a federal regulator over his alleged responsibility for improper accounting at the mortgage finance giant.
Raines, who headed the Office of Management and Budget in the Clinton administration, left Fannie Mae in 2004 after the Securities and Exchange Commission determined that it had used improper accounting. The federally chartered mortgage-funding company later corrected its books, wiping out $6.3 billion of previously reported profit.
OFHEO Director James B. Lockhart III said the former executives “improperly manipulated earnings to maximize their bonuses . . . misleading the regulator and the public.” These charges cover 1998 to 2004.
Raines’s lawyer, Kevin M. Downey, has alleged that Lockhart was using the case to advance the argument that Congress should give regulators more power over Fannie Mae and its rival Freddie Mac of McLean. We wouldn’t want that now, would we, especially since Raines is an Obama contributor.
But who appointed James B. Lockhart III?
He was nominated by President George W. Bush
From a speech he gave in 2006:
A key part of the paper focuses on whether Fannie Mae and Freddie Mac have had measurable effects on assisting individuals to buy houses that reflect their future incomes. This is an important question.
The answer has obvious implications for forthcoming policies regarding these two Government-Sponsored Enterprises (GSEs). But one policy that should not be affected is the government’s commitment to ensuring the safety and soundness of these enormous institutions, and reducing the risks to the financial systems that they pose. This is an area where action is needed now.
The case for GSE reform is very strong given Fannie Mae’s and Freddie Mac’s mismanagement history and the risks caused by their massive size. Their combined $4.1 trillion in debt and guaranteed mortgage backed securities (MBS) at year-end 2005 is not that much smaller than the whole debt of the U.S. held by the public of $4.7 trillion or, for that matter, a number engraved in my mind, the 75-year net present value Social Security shortfall of $4.6 trillion (#2).
Both companies, a large bipartisan group of Senators and Members of Congress, and the Bush Administration all support reform. We now need to get the ball across the goal line when Congress returns in November.
You are all aware of Fannie Mae’s and Freddie Mac’s accounting scandals, earnings manipulation, and management failures. OFHEO is focused on making them fix these problems which will take several more years. What we have learned from these failures is that the companies have serious problems and need strengthening and that OFHEO did not have the powers to prevent those problems.
Yesterday, one of the CEO’s said that the systemic risk is being “misapplied to the GSEs.” His argument is that by concentrating risk into two massive portfolios and then hedging their duration with some callable debt and large derivative portfolios makes the system “safer.” Of course, the callable debt and derivatives just pass the mortgage prepayment risk elsewhere. Also, it is a fact that they do retain some of this prepayment risk to increase their returns. He ignores the inability of the GSEs to diversify to reduce risk, unlike banks. He also ignores the fact that systemic risk is much broader than market risk and can be caused by operational problems, including deficient models or unauthorized trading. A stronger regulator and maller portfolios should help to reduce the potential for systemic risk
What is needed to get it right when Congress returns in November? (#6) Let’s view it first from the Enterprises’ standpoint and then by each component of legislation currently pending before Congress.
So who was in favor of regulation in 2006?
John McCain
May 25, 2006: I urge my colleagues to support swift action on this GSE reform legislation.
From here on in the finger pointing starts.
Filibuster? Democratic partisan vote? GOP failure to bring to floor vote? Disagreement with amendment to House version?
Speculation is that S190 did pass committee, but never made it to a vote.
Trying to hang everything on one of the sponsors of the regulation legislation is like blaming a paramedic for the injuries to their patient.
So if McCain was manipulated by lobbyists to prevent regulation of the GSE’s, why did he then cosponsor and ask for passage of that legislation?
It’s interesting to note how the only person in the current campaign that attempted to get a handle on the problem of the GSE’s was McCain, and dishonest leftists like David R are attempting to pretend just the opposite.
Why, if Barack Obama was a part of the Senate at this time, did he not sponsor any legislation?
Maybe Franklin Raines knows.
Apogee (366e8b) — 9/24/2008 @ 2:10 amHow much worse can it be than $700 billion?
— $700,000,000,001
Count me in the not yet convinced how bad it could be.
— So you might be convinced that it won’t be all that bad. That’s a good positive step towards optimism for you.
Same old script, different characters.
— McGovern bin
EagletonShriver, meet Obama bin Biden.No. I’m a free market guy.
— No. You’re a free market ga– Sorry. Got confused and thought I was talkin’ to Sully for a moment.
The facts are. McCain voted with Bush 90% of the time.
— The fact is, that doesn’t mean what you want it to mean, and no matter how many times you repeat it that will not change.
You changed it to McCain is the candidate for change which is utterly absurd.
Icy Truth (391c85) — 9/24/2008 @ 6:10 am— And who actually said that? Was it SPRQ?
No, it was you.
This may show my ignorance of big business, but is there not a way to keep the top execs from getting their “golden parachute”? It’s frustrating that they exist at all, but in the face of huge failure, should they not just disappear the way of their profits?
yourlilsis (095089) — 9/24/2008 @ 12:00 pmWe need an independent outside group to investigate the Fannie Mae and Freedie Mac bust. I think Barney Frank, Chris Dodd and the rest of them need to be under investigation. They had ample warning and refused to do anything. They should both resign. Also, they both support ACORN the most far left politcal partisan group ever.
Jim Kreason (769e39) — 10/2/2008 @ 12:23 pm