Seth Bailey

The 5% Bailout: Jeb Hensarling Trashes TARP

by Seth Bailey on March 6, 2009 · 1 comment

in Bailout Watch, Economy

The Congressional Oversight Panel (COP), which oversees the spending of TARP funds,  released its March report today entitled “Foreclosure Crisis: Working Toward a Solution.”

But are we actually facing a foreclosure crisis?  The left chastises “deregulation” as the evil at hand when the Government Sponsored Entities Fannie Mae and Freddie Mac purchased the majority of subprime loans.  This in turn forced private banks to enter the market in order to compete with Fannie and Freddie.

As Rep. Rep. Jeb Hensarling writes, subsidizing foreclosures creates a moral hazard (emphasis added):

[I]t is a fact even admitted by the majority report that some loan modifications are simply not economical and thus some foreclosures are inevitable.

So the government is going to bailout everyone.  Thank you.  The next question becomes much more difficult: where should the line be drawn?  Rep. Hensarling writes in his alternative view (emphasis in original):

Without a doubt, in any loan mitigation program there will be some otherwise eligible borrowers who can pay their mortgages but who choose not to pay them or not to make the difficult decisions to sacrifice on other things because they want to get relief.

However, this has been “nearly universally omitted” from government plans.

According to a Comptroller of the Currency and Office of Thrift Supervision report, the rate of delinquency after loan modification has increased from the first to second quarter of 2008: jumping to slightly over 40%.

So, if loan modification is largely not working in over half of the scenarios, why should we spend $100 billion dollars?  Then again, government is used to throwing money at programs that have massive failure rates.

If you think this is bad news, look at the statistics of who’s really having loan problems now.  A Mortgage Bankers Association report found that second homes accounted for about a fifth of foreclosures in 2007.

Then the fun begins.  According to a U.S. Census Bureau survey, only 46% of the population actually has a mortgage: the other 54% have paid off their mortgage or rent.

But the federal government is involved in the supposed mortgage problem because it is a problem that affects our country at large, right?  Wrong.  Only nine states have foreclosure rates above the national average.

The delinquency statistics: loans over due by 30 days account for a mere 7.29% of loans and those in foreclosure, a minuscule 2.97%.  So about 10% of loans are late.  This number alone creates a mystery to the hysteria, however, when combined with the fact that less the half of Americans have a mortgage the number reduces by half: 5%.

Rep. Hensarling asks (again, emphasis in original):

Is it fair to expect 19 out of every 20 people to pay more in taxes to help the 20th person maintain their current residence?

As a lover of liberty and limited government, the answer is clearly no.

TARP Challenged in Federal Court

by Seth Bailey on February 9, 2009 · 1 comment

in Bailout Watch, Legal

Three businesses and five individuals recently brought suit against the Troubled Asset Relief Program (TARP) in the Eastern District of New York.  The case, Henry Builders et al. v. US, alleges that the TARP violated their Fifth and Fourteenth Amendment equal protection rights.  The plaintiffs sought to have their mortgages paid by the government as well and possibly the actual use of the TARP funds.

While the case was ultimately dismissed with prejudice, meaning that the same parties cannot be brought before the court again, the merits of the case were not reached.  The main argument, violation of equal protection, did not receive an opinion.  The plaintiffs challenge the TARP’s exclusive arrangement with financial institutions.  Perhaps the most important holding of the case held that financial institutions were not suspect classifications – a branch of equal protection law that requires more stringent review in addition to making it easier to overturn a law.  Instead, District Judge Vitaliano ruled that the plaintiffs did not have standing.

Article III of the Constitution requires standing in every case brought to the court under its case or controversy provision.  Plaintiffs must prove 1) an injury that is concrete and unique.  This injury can be either actual or imminent.  2) The injury must be causally connected to the complaint and 3) a victory in court would correct the injury.

The court ruled that the plaintiffs did not meet the first standing requirement.  The court explained that the claims, similar to suits brought by taxpayers in general, are “shared with millions of others” and, therefore, not unique. It remains unclear whether the case was dismissed on being brought as a taxpayer suit.  The court notes that the plaintiffs never attempted to apply for TARP funds.

While the plaintiffs would have almost certainly been denied an application, the statute is so ambiguous and if Paulson was in a good mood – no one knows.  Filing worthless pieces of paper sometimes comes in handy.  For instance in District of Columbia v. Heller (the case overturning the DC gun ban), Heller filed for a handgun permit from the District.  Although he was denied the permit that did not exist, this action gave Heller standing to pursue his case in court ultimately serving as the best for the most important Second Amendment decision ever decided.

If anyone has standing, it will most likely be from a competitor who did not receive bailout funding.  A company in this position may not even have to file for TARP money if the company is clearly ineligible on its face.

This is the first of many cases to challenge the TARP.  It does not signal a defeat to every challenge to the TARP.  When a court grants standing to a plaintiff, the merits of the case must be heard.  The TARP clearly violates the Founding Fathers’ vision of the Constitution – now lets hope the courts agree.

The COPs are back

by Seth Bailey on February 9, 2009

in Bailout Watch, Odds & Ends

Today has seen much activity and media coverage of the TARP’s Congressional Oversight Panel.  Today the Panel released a number of reports on their blog—once again blasting the TARP. “Treasury simply did not do what it said it was doing,” Ms. Warren said at a hearing before the Senate banking committee. The reports released include the third monthly report, a valuation report and a legal analysis. As previously written on OpenMarket, the COP only blows smoke.

They do, however, realize that the TARP is not working:

The Panel’s analysis revealed that in the ten largest transactions made with TARP funds, for every $100 spent by Treasury, it received assets worth, on average, only $66. This disparity translates into a $78 billion shortfall for the first $254 billion in TARP funds that were spent.

This could have been avoided had the Treasury used the ability to buy assets at auction as authorized under s. 111(c) of the EESA.  Too many times in recent history have legislators proposed massive bills with little deliberation that deeply impact not only American citizens but also the world. This provision is written in the law!  Having extensive laws does nothing but create problems with enforcement and the creation of loopholes — for instance the Detroit bailout.

The Obama administration will be unveiling the next plan for spending tomorrow.  If there is going to be government spending, the government should certainly thoroughly consider the methods it may use in addition to their effectiveness.

Blind potshots with billions of taxpayer dollars only furthers the ideals of limited government.  The popularity of the bailout illuminates this fact.

COP, America’s Financial Paper Tiger

by Seth Bailey on January 29, 2009 · 2 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Regulation

The Congressional Oversight Panel (COP) recently issued a report on the TARP.  This report represents the second in a monthly series of reports to be issued while there are outstanding TARP investments.  While the COP report generated a lot of media attention drawing criticism of the TARP’s expenditure and opaque process.

However, the media did not cover how powerless COP really is.  In the full text of the report, the panel repeatedly states that Treasury did not answer many of its questions – either effectively or in entirety.  The tough questions did not get answered or were simply avoided.

In the words of COP, they are “concerned that Treasury’s initial response to our questions is not comprehensive and seems largely derived from earlier Treasury public statements.”  Unfortunately, the panel is working as designed by the legislation laying out the TARP.  The COP simply does not have the power to demand answers from Treasury.

Furthermore, the COP looks to expand its power by making “recommendations on the best ways to [minimize] foreclosures” in their third report – due out early next month.  This may sound great, but the COP does not even have the statutory power to make such recommendations.  Only the Financial Stability Oversight Board has such a power.

  1. When the COP asked Treasury about its strategy in administering the TARP, Treasury responded with programs that were not a part of TARP at all.  This problem also arised in addressing the strategy to reduce foreclosures.
  2. The COP “continues to believe that Treasury needs to set forth the metrics by which these goals will be judged.”  In other words, the Treasury refuses to tell the COP or for that matter the public about criteria to judge how TARP are being spent.

Most interesting, when asked about what financial institutions, assisted by the TARP, have done with the bailout money, their reponse seems to dodge the issue.  “Treasury appears to believe the question is beside point” citing larger market trends as making the TARPs impact difficult to ascertain.

The COP also asked about what Treasury is doing to “help the American family.”  While this may seem like an increadibly vague question, Treasury responded by saying that access to consumer credit does not involve suggesting or forcing banks to take consumer-friendly actions.

In a separate statement by panel member Sen. John E. Sununu, he states that taking this sort of action is completely inappropriate because  “the current crisis was caused, in large part, by the extension of too much credit to institutions and individuals that were not creditworthy.”

Unanswerable or inappropriate questions posed to adminstrators of billions of taxpayer dollars serves as the basis for a poor program.