The $26 billion mortgage settlement announced yesterday is bad news for “bond investors including pension funds, according to Pacific Investment Management Co.’s Scott Simon,” notes Bloomberg News.  He says that the settlement rips off innocent investors and pension funds in order to reduce the banks’ costs of bailing out delinquent mortgage borrowers and others.  (As we noted earlier, the Justice Department, state attorneys general, and the biggest banks reached an agreement to provide $26 billion to delinquent mortgage borrowers and others, such as left-wing housing counseling similar to ACORN — in what the New York Post calls a “deadbeat bailout”).  As Simon notes,

“They’re using other people’s money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load.”

Asset managers are frustrated with the deal because, in addition to the debt the banks own, it gives credit to the lenders for changes to loans they hold no interest in and oversee for investors. That “treats people’s 401(k)s and pensions,” which hold mortgage securities, “like perpetrators as opposed to victims,” Simon said. The deal comes after all 50 states announced a probe into foreclosures in 2010 . . . costing bondholders as liquidations of bad debt were delayed.

“Think about this, you tell your kid, ‘You did something bad, I’m going to fine you $10, but if you can steal $22 from your mom, you can pay me with that,’ ” Simon said yesterday. . .

Laurie Goodman . . . who has advocated for mortgage forgiveness in testimony to Congress, joined him in criticizing the agreement yesterday. . .“There is a difference between principal reductions and giving banks credit for spending others’ people money.”

As we noted earlier, by ripping off mortgage investors, this deal will make investing in mortgages more risky, which will in turn drive up interest rates that homebuyers have to pay in the future.  This deal only covers borrowers at certain banks, not those borrowers who mortgages are held by the government-sponsored mortgage giants Fannie Mae and Freddie Mac, which (unlike the private banks) have never repaid their bailout, and are currently still being bailed out at an ever-increasing tab of $170 billion.

This deal is not the only way that federal and state officials are messing up the housing market.  The Obama administration is forcing banks to make risky loans (in the name of “fair lending”), thus planting the seeds of a future financial crisis. The Justice Department is suing banks that refuse to do so, and forcing them both to award preferential loans based on race, and to cough up money in “settlements,” some of which goes to left-wing “community” groups.

The Obama administration recently launched a multibillion dollar bailout for speculators. Bloomberg News reported that the administration is vastly expanding aid for certain “delinquent homeowners,” paying banks up to 63 cents for every dollar in principal they write off for such homeowners.  Speculators will benefit, because bailout recipients don’t even have to live in a house to get its mortgage principal reduced at taxpayer expense.

The Justice Department, state attorneys general, and the biggest banks have reached an agreement to provide at least $26 billion to delinquent mortgage borrowers and others, such as left-wing housing counseling groups similar to ACORN. But if you were financially responsible, you very likely won’t benefit from this settlement, but may actually be harmed by it. It only benefits a small fraction of people who were foreclosed upon, as well as some underwater borrowers, most of them delinquent, whose mortgages were serviced by certain banks. You likely won’t get any money or principal reduction under this settlement if you paid your mortgage on time, especially if you were thrifty enough to make a large down payment (which usually prevents you from ending up underwater on your mortgage unless there is a huge decline in housing values). Instead, you may suffer, because the settlement may lead to mortgage interest rates rising in the future.  (Politicians’ desire for this settlement was based on voodoo economics).

One feature of the agreement is that some delinquent borrowers who are underwater will see their mortgage principal reduced. But the cost of these principal reductions may be borne heavily by innocent third parties, not just the banks: the banks only retained a fraction of the mortgages they originated, selling the rest to mortgage investors (including some pension funds). So the banks are going to write off mortgage principal that is not wholly theirs, but rather the property of third-party investors, raising serious contractual and property rights issues. The settlement contains provisions which reward the banks for cutting mortgage principal balances through a specified formula, creating a serious conflict of interest between the banks and the investors on whose behalf the banks service the loan.

One sign that this cost-shift is real is that the stock price of Bank of America, the bank that will reduce the largest number of mortgages under this settlement, actually went up today, even as most banks’ stock price went down, despite bad news on other legal fronts for Bank of America. Once this cost-shifting happens, mortgages will become a more risky, less attractive investment for Wall Street investors and pension funds in the future, and banks will get less money from investors for them at any given interest rate — which will lead to banks charging a higher interest rate to borrowers to offset the increased risk. AEI’s James Pethokoukis, a former Reuters financial reporter, discussed earlier how Obama’s proposed mass refinancing proposal might have a similar effect that would backfire on America’s borrowers and home purchasers and result in increased interest rates in the future.

So essentially, responsible people are being tapped once again to bail out the irresponsible. As The New York Times notes, “Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure.”

Curiously, while the government apparently wants to milk innocent third party investors to finance the settlement, government agencies and government-controlled mortgage giants are not chipping anything in yet. As USA Today notes, the settlement’s principal reductions “will not include any loans owned by mortgage giants Freddie Mac, Fannie Mae, or the Federal Housing Finance Administration.” This is in contrast to 2009, when the Obama administration made these government-sponsored mortgage giants run up $30 billion in losses bailing out even high-income mortgage borrowers. The Obama administration earlier lifted the $400 billion limit on bailouts for Fannie Mae and Freddie Mac, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation. The administration has spent $170 billion propping up these two government-backed mortgage giants, which helped spawn the financial crisis, and has given them competitive advantages over private enterprises.

Meanwhile, the Obama administration is forcing banks to make risky loans (in the name of “fair lending”), thus planting the seeds of a future financial crisis. The Justice Department is suing banks that refuse to do so, and forcing them both to award preferential loans based on race, and to cough up money in “settlements,” some of which goes to left-wing “community” groups that are allied with the Obama administration.

The Obama administration recently began a multibillion dollar bailout for speculators. Bloomberg News reported that the administration is vastly expanding aid for certain “delinquent homeowners,” paying banks up to 63 cents for every dollar in principal they write off for such homeowners, a tripling of what banks can currently get under the HAMP bailout program. Speculators will benefit, too: they don’t even have to live in a house to get its mortgage principal reduced: “Investors who rent out their properties would be eligible to refinance under the new rules.”

In his State of the Union address, President Obama, a consistent supporter of bailouts and crony capitalism, hypocritically railed against them, proclaiming, “no bailouts, no handouts, and no cop-outs.” Just a couple days later, though, his administration is rolling out a massive multibillion dollar bailout that will enrich speculators. Bloomberg News reports that the Obama Administration is vastly expanding aid for certain “delinquent homeowners,” paying banks up to 63 cents for every dollar in principal they write off for such homeowners, a tripling of what banks can currently get under the HAMP bailout program. Speculators will benefit, too: they don’t even have to live in a house to get its mortgage principal reduced: “Investors who rent out their properties would be eligible to refinance under the new rules.” In the coming weeks, the Obama administration is expected to roll out an ill-conceived mass mortgage  refinancing program that could shrink your 401(k) and increase the cost of mortgage financing for future borrowers.

We previously wrote about the voodoo economics behind the Obama administration’s mortgage bailout ideas, which will cost taxpayers countless billions.

Obama’s State of the Union address also contained false claims about outsourcing and corporate taxes. The Obama administration has used green-jobs money from the stimulus package to enrich foreign green-energy firms and outsource American jobs to countries like China: “79 percent” of all green-jobs funding “went to companies based overseas,” and “the largest grant” it made “went to Babcock & Brown,” a “bankrupt Australian company,” noted the Investigative Reporting Workshop at American University. This just one of the ways the Obama administration used taxpayer money to outsource American jobs to foreign countries.

“After spending $55 million of a $118.5 million grant from” the U.S. “Department of Energy, Ener1, an Indianapolis-based maker of batteries,” has just “declared bankruptcy.”

The White House had enthusiastically touted the company, which gave rise to an embarrassing gaffe by Vice President Biden:

Vice President Biden visited Ener1 one year ago, January 26, 2011. . .On several occasions, Biden called the company “Enron one” during his visit, invoking a seemingly unintentional but ultimately prescient reference to the collapse of the energy giant Enron. The company was also ranked number 67 in the White House Report: 100 Recovery Projects that are Changing America.

To some, the bankrupt firm is a “candidate in the increasingly competitive race to become the Next Solyndra.” But in reality, several other recipients of green-jobs subsidies under the stimulus package have already gone broke. CBS News had earlier reported that there were 11 Solyndras — that is, financially-troubled recipients of green-jobs subsidies, five of which had already filed for bankruptcy. After the CBS News report, Evergreen Energy, another green-jobs recipient, filed for bankruptcy.

President Obama touted similar green-jobs boondoggles in his 2012 State of the Union address. In his 2010 State of the Union, the president touted Solyndra, which went bankrupt a year later after receiving $535 million from taxpayers. As Rep. Cliff Stearns noted:

Only two days after President Obama highlighted federal investments in high-tech batteries in his State of the Union address, Ener1 joined Solyndra, Beacon Power, Evergreen Solar, SpecrtaWatt, and AES in bankruptcy – all recipients of taxpayer dollars.  We have a national debt exceeding $15 trillion, and the Administration is borrowing money from China to waste on subsidies for companies that are not viable.

As The Washington Post noted, energy programs have been “infused with politics at every level” during the Obama administration. It hastily approved subsidies for Solyndra, whose executives are now pleading the 5th Amendment, despite obvious danger signs and warnings about the company’s likely collapse. (Later, federal officials successfully pressured Solyndra to delay its announcement about upcoming layoffs until just after the 2010 election, to avoid embarrassing the Obama administration.)

The Obama administration has used green-jobs money from the stimulus package to outsource American jobs to countries like China: “Despite all the talk of green jobs, the overwhelming majority of stimulus money spent on wind power has gone to foreign companies, according to a new report by the Investigative Reporting Workshop at the American University’s School of Communication in Washington, D.C.” As the Investigative Reporting Workshop noted, “79 percent” of all green-jobs funding “went to companies based overseas . . . In fact, the largest grant made under the program so far, a $178 million payment on Dec. 29, went to Babcock & Brown, a bankrupt Australian company.” This just one of many ways in which the Obama administration has used taxpayer money to outsource American jobs to foreign countries.

AEI’s James Pethokoukis says that the mass-refinancing plan proposed by President Obama in his State of the Union address would “result in higher financing costs going forward.”  It’s designed to create a short-term “boost for the economy going into the election.” The plan would also harm bank shareholders and people approaching retirement  (most mutual funds that people hold in their 401(k) plans have holdings in banks and thus would be harmed, reduced the size of people’s retirement plans, over the long run). Pethokoukis quotes a financial analyst at Guggenheim Washington Research Group who notes that “that a mass refinancing could permanently drive housing finance costs higher. This is a real threat as investors are likely to demand a premium if government policy materially accelerates prepayment rates.” Pethokoukis calls this mortgage bailout proposal Obama’s “January surprise.”

The Obama administration is also harming the housing market by pressuring banks to make risky loans to minorities with bad credit, using the threat of massive Justice Department lawsuits. The Assistant Attorney General for Civil Rights, Thomas Perez, has compared bankers to “Klansmen,” and extracted settlements from banks “setting aside prime-rate mortgages for low-income blacks and Hispanics with blemished credit,” and treating welfare “as valid income in mortgage applications,” noted Investor’s Business Daily.

The last thing the housing market needs is more federal government meddling. A recent book about the causes of the crisis by New York Times business reporter Gretchen Morgenson and financial analyst Josh Rosner, Reckless Endangerment, chronicles how “it was [the government-sponsored enterprise] Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.” Financial analysts have recently concluded that federal agencies and the Government-Sponsored Enterprises played a larger role in causing the financial crisis than previously thought.

The financial crisis was caused partly by “diversity” mandates and affordable housing mandates that encouraged lending to people with bad credit scores who later defaulted on their loans. Banks were under great pressure from liberal lawmakers to make loans to low-income and minority borrowers. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers,” The New York Times noted. As The Washington Examiner noted, the government also “encouraged riskier mortgage lending by minimizing the role of credit histories in lending decisions,” and “loosening required debt-to-equity ratios to allow  borrowers to make small or even no down payments at all.” The liberal Village Voice previously chronicled how Clinton administration Housing and Urban Development Secretary Andrew Cuomo helped spawn the mortgage crisis through his pressure on lenders to promote affordable housing and diversity. “Andrew Cuomo, the youngest HUD secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that — in combination with many other factors — helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.”

President Obama has spent billions of dollars in taxpayer money on subsidizing foreign firms through his failed “green energy” programs, so it was ironic and hypocritical when he attacked outsourcing in his State of the Union address. As former congressional economist Chris Edwards notes, Obama made many blatantly false claims about outsourcing and corporate taxation in his speech. Here are just a few:

Claim: “Right now, companies get tax breaks for moving jobs and profits overseas.”

False: There are no such breaks. Instead, we punish U.S. and foreign businesses for investing and creating jobs here.

Claim: “If you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it.”

False: There is no such tax deduction. . .

Claim: “From now on, every multinational company should have to pay a basic minimum tax.”

False: We’ve already got a corporate “alternative minimum tax,” and it’s an idiotic waste of accounting resources that ought to be repealed.

Claim: “It is time to stop rewarding businesses that ship jobs overseas.”

False: We penalize them for locating jobs here. Besides, the overseas operations of U.S. companies generally complement domestic jobs by boosting U.S. exports.

Claim: “Companies that choose to stay in America get hit with one of the highest tax rates in the world.”

True: Our rate is 40 percent, which compares to the global average rate of just 23 percent.

The irony of the president’s claims is that he himself is the Outsourcer-in-Chief and King of Outsourcing, given how many jobs have been — and will be — driven out of America thanks to government subsidies in the $800 billion stimulus package that were given to foreign firms (like a bankrupt Australian company), and Obama administration financial regulations that effectively discriminate against American companies in favor of overseas firms, and impose billions in new costs on American manufacturers. American manufacturers face a growing mountain of red tape that has caused layoffs among medical device manufacturers, and 4,300 employees of an insurance company were recently laid off due to the 2010 Dodd-Frank law backed by the Obama administration. The Dodd-Frank law is also expected to drive well-paying proprietary-trading jobs overseas to Europe. The Obama administration has also imposed harmful and costly labor and employment regulations on American manufacturers.

Weirdly enough, President Obama supports taxpayer-subsidized outsourcing by companies headed by his political supporters (like GE), even while criticizing non-subsidized (free-market-based) outsourcing, which — unlike taxpayer-subsidized outsourcing — can actually save American jobs by reducing the cost of finished goods sold by American companies. (A struggling firm’s decisions to outsource some functions can actually save American jobs in the long run. An American manufacturer of a finished product, facing stiff cost competition from overseas manufacturers, can reduce its overall costs, and thus avoid going out of business, by outsourcing low-skill jobs producing crude components of the finished product to low-wage overseas workers, thus enabling the more valuable finished product designed or assembled by skilled American workers to be cost-competitive with finished goods produced entirely overseas.)

The Associated Press evaluates some of Obama’s claims in “Fact Check: Obama Pushes Plans That Flopped Before.”

There are 11 more Solyndras in the Obama administration’s clean-energy program, reports CBS News. These companies are in financial trouble — five have already gone bankrupt — after receiving billions in federal assistance despite warning signs that their projects were not viable. I discuss this and the Solyndra scandal in more detail at this link.

While costing taxpayers billions, the Obama administration’s green jobs programs have failed to create viable jobs. Instead, they have been used to outsource American jobs to countries like China. American University’s Investigative Reporting Workshop found that 79 percent of green-jobs funds went to foreign firms, like a bankrupt Australian company.

The Obama administration has also wiped out jobs through its policies on health care, financial regulation, and labor and employment law.

It’s not every day that the front page of The New York Times has two articles that highlight the importance of limited government, but today’s edition does exactly that. The first article describes how the Citizens United Supreme Court decision to allow corporations and unions to spend unlimited amounts on political causes has actually benefited free-speech and the political process.

Under the old political rules, Mitt Romney arrived in South Carolina this week the prohibitive Republican front-runner: flush with cash, awash in endorsements from a party establishment starting to coalesce behind him and buoyed by victories in Iowa and New Hampshire.

But as Mr. Romney is quickly learning, those rules no longer apply. Mr. Romney’s carefully tended network of Republican donors has been rendered functionally less important by “super PACs,” through which a handful of wealthy individuals are financing a multimillion-dollar advertising barrage to assail his record and prop up his opponents….

As a result, Mr. Romney’s remaining opponents have little incentive to drop out, knowing that their support from super PACs and Internet contributions from grass-roots supporters can keep them in the race long after they would have remained viable in earlier eras…

In other words, Republicans are actually getting more time to make a decision, more information about the candidates, and more debate about the issues as a result of the Citizens United decision. As John Samples shows in his book The Fallacy of Campaign Finance Reform, the motto “more money = more speech” does, in reality, hold true.

The second NYT article documented the ludicrous goings on at the Federal Reserve prior the housing market collapse in 2007 and 2008. If ever there was an argument against central planning, the wisdom of bureaucrats, or a case for greater transparency, this is it:

As the housing bubble entered its waning hours in 2006, top Federal Reserve officials marveled at the desperate antics of home builders seeking to lure buyers. The officials laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was “rising through the roof.”

But the officials, meeting every six weeks to discuss the health of the nation’s economy, gave little credence to the possibility that the faltering housing market would weigh on the broader economy, according to transcripts that the Fed released Thursday. Instead they continued to tell one another throughout 2006 that the greatest danger was inflation — the possibility that the economy would grow too fast. “We think the fundamentals of the expansion going forward still look good,” Timothy Geithner, then president of the Federal Reserve Bank of New York, told his colleagues when they gathered in Washington in December 2006….

This pathetic display was finally released this week after the Fed suppressed the records for the past five years. These same people who joked about the absurd economy they helped create, who failed to see that it couldn’t last, used the collapse to get even more power than ever before. As Obama’s former-Chief of Staff has said, Let no serious crisis go to waste.

Mere months after President Obama and Congress last tussled over the debt ceiling, the United States has once more reached its legal borrowing limit. But it still needs more. The Wall Street Journal reports:

The U.S. government was just a hair below the $15.194 trillion debt ceiling on Tuesday, $25 million shy of the limit Congress set last summer. President Barack Obama sent a letter to congressional leaders Thursday, saying the U.S. debt was within $100 million of the ceiling “and that further borrowing is required to meet existing commitments.”

The “further borrowing” required to meet our commitments will amount to another $1.2 trillion, if the Treasury Department and the president get their way. And if they don’t? Again, from the Journal:

The practical implications of failing to raise the debt ceiling are pretty severe, according to government officials and market analysts. The government can only borrow money up to the limit, and because the government spends more money than it brings in through taxes and other receipts it is constantly running up the debt. Failing to raise the ceiling would mean the government would have to make severe cuts in spending to avoid defaulting on debt obligations.

So we are faced with an insoluble dilemma, which goes something like this: Default on the debt and inflict tremendous economic pain now, or keep borrowing and inflict even worse economic pain in the future, because, let’s face it, you can’t borrow forever. And what can’t go on forever will, as the saying goes, someday stop.

The problem is that some people, a lot of people, believe that there is no reason borrowing can’t go on forever. This notion that debt is inherently benign, or that its dangers are overblown, is a deadly meme that has penetrated the brains of a large number of elites in the governing and professional classes. You find it mostly on the left (I saw some liberal talking head spouting this nonsense on cable TV the other day), but also on the right, as when Dick Cheney once foolishly remarked that “deficits don’t matter.”

How could such a deadly meme take root? Easy — though it is poison to the nation, it has been very beneficial to the careers of individual politicians of both parties, who have have used borrowed monies to dispense favors to preferred voting blocks in the (usually successful) hope of buying loyalty for the next election.

It is the big, structural flaw in the heart of democratic government that was well-known even to the inventors of such government; the Greeks and Romans fretted over this flaw and endlessly debated how, or even if, it could be corrected. They never resolved the matter and sure enough, the ancient democracies and republics soon passed into history, tyrannies rising on their corpses.

How ironic that Greece, once again, is showing us the consequence of the road we are on. The Washington Post reports that in “deeply indebted and nearly bankrupt,” Greece, parents are abandoning their children “because of the deepening financial crisis”:

Athens-based Ark of the World, a nonprofit group that takes care of youth, says children as young as newborns have been left at their doorsteps. One parent left her 4-year-old girl at the center with a note that read: “I will not be coming to pick up Anna today because I cannot afford to look after her. Please take good care of her. Sorry.”

A nation that is abandoning its children is abandoning – literally – its future. This is the inevitable end of a road built on little more than IOUs.

In a recent letter in The New York Times, I noted the role played by the government-sponsored enterprises, Fannie Mae and Freddie Mac, in spawning the financial crisis and burdening taxpayers to the tune of hundreds of billions of dollars. The two mortgage giants bought up risky sub-prime mortgages partly in order to satisfy government affordable-housing mandates, as even the liberal Village Voice found in its investigative reporting. Even Fannie Mae’s 2006 10-K form with the SEC noted the role of HUD’s affordable-housing mandates as a factor in its purchase of mortgages it would once have avoided as too risky:

[W]e have made, and continue to make, significant adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet HUD’s increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns than our typical transactions. We have also relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUD’s goals and subgoals, which could increase our credit losses. [emphasis supplied]

Some commentators at liberal newspapers, like The New York Times‘ Joe Nocera, have argued that Fannie and Freddie bought up risky mortgages in order to maintain their market share, not to satisfy affordable-housing mandates, and that this somehow minimizes their role in the mortgage crisis, contrary to the arguments of Peter Wallison, who prophetically predicted that Fannie and Freddie would someday have to be bailed out by taxpayers, and argued in his opinion at the Financial Crisis Inquiry Commission that Fannie and Freddie were a major contributor to the financial crisis.

I find Nocera’s argument baffling. If Fannie and Freddie bought up junky mortgages solely to maintain their market share (which I doubt), rather than to satisfy affordable-housing mandates, that strikes me as making them even more culpable, as I explained in a letter in the January 4 edition of The New York Times:

I found Joe Nocera’s attempt to minimize the role of Fannie Mae and Freddie Mac in the financial crisis unconvincing (“The Big Lie,” column, Dec. 24).

These two government-sponsored enterprises went broke and ended up being bailed out by taxpayers at cost of more than $170 billion — a cost that has never been repaid and continues to increase. By contrast, the private banks repaid their bailouts. Fannie and Freddie, not the banks, imposed the bigger burden on taxpayers.

That enormous burden is in no way alleviated if, as Mr. Nocera claims, Fannie and Freddie bought up risky subprime mortgages to maintain their market share, rather than to satisfy affordable-housing mandates. That simply underscores their shortsighted greed and complicity in the financial crisis.

Given their thin capitalization and what is effectively a taxpayer guarantee, Fannie and Freddie had no business dabbling in risky subprime loans in the first place.

Former Fannie Mae executive Ed Pinto, who worked at the mortgage giant before it began buying up risky mortgages, has also described Fannie Mae’s key role in buying up and promoting risky sub-prime mortgages, which Fannie Mae did on a large scale, despite having a capital cushion that was tiny compared to private banks, resulting in its later insolvency and massive taxpayer bailout. A recent book about the causes of the crisis by New York Times business reporter Gretchen Morgenson and financial analyst Josh Rosner, “Reckless Endangerment,” chronicles how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.” Financial analysts have recently concluded that federal agencies and the GSEs played a larger role in causing the financial crisis than previously thought.