bailouts

Fannie Mae Backers Unrepentant Despite Its Fraud and Colossal Bailout

by Hans Bader on January 29, 2011 · 4 comments

in Bailout Watch, Economy, Politics as Usual, Sanctimony, Zeitgeist

Fannie Mae and Freddie Mac were bailed out at a cost to taxpayers of between $148 billion and $363 billion. Their recklessness and wrongdoing was so obvious that even Treasury Secretary Geithner admits that “Fannie and Freddie were a core part of what went wrong” in the financial crisis. The two government-sponsored mortgage giants engaged in massive accounting fraud, and their allies in the Obama administration have now spent $160 million in taxpayer money defending them against various charges.

Yet, their longtime defenders, like the Washington Post’s Steven Pearlstein, are completely unrepentant. They continue to suggest that only right-wing ideologues could want to eliminate scandal-plagued Fannie and Freddie. Pearlstein long dismissed warnings from conservatives like the Wall Street Journal’s Paul Gigot about the dangers these mortgage giants posed to our financial system.

Incredibly, Pearlstein still believes that what’s good for Fannie and Freddie is good for America. In the January 23 Washington Post, Pearlstein showed he has learned nothing from the financial crisis.  Pearlstein called House Republicans “free-market ideologues” for wanting to rein in the two companies. He praised “low-income-housing advocates and the Obama administration” for opposing this reform effort.  He suggested that access to mortgages (and thus, homeownership) would suffer without Fannie and Freddie, ignoring the fact that homeownership rates are higher in countries like Chile and Italy that have nothing like Fannie or Freddie.

The last thing America needs is to keep Fannie and Freddie around to help spawn the next financial crisis. Fannie and Freddie helped spawn the current mortgage crisis by buying up risky mortgages and repackaging them as prime mortgages, thus creating an artificial market for junk: “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.” As Government-Sponsored Enterprises, they were not subject to the sort of capital requirements that apply to private entities, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Congressional Democrats last year blocked a GOP amendment that would have reformed the  government-sponsored mortgage giants, Fannie Mae and Freddie Mac.  The Obama administration lifted a $400 billion limit on bailing them out and showered their executives with $42 million in pay.

At the direction of the Obama administration, Freddie Mac ran up more than $30 billion in losses to bail out mortgage borrowers, some of whom had high incomes. Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.

Obama received $125,000 in contributions from Fannie Mae and Freddie Mac executives as a senator, second only to the Senator Chris Dodd, who was forced to retire last year over financial improprieties (such as his real estate gift from a lobbyist and “sweetheart mortgage from Countrywide Financial“), yet was the chief drafter of the Dodd-Frank financial “reform” law.  (Dodd-Frank harms the economy, and violates both the Constitution’s separation of powers, and private property and equal-protection rights).

Despite the devastating financial impact of Fannie Mae and Freddie Mac’s mistakes, their defenders are as unrepentant, and perhaps as influential, as ever.  Don’t expect their allies in the Obama administration to endorse any meaningful reforms.

America’s Wealthiest County Used Bailout Money to Give Teachers a Paid Vacation

by Hans Bader on November 29, 2010 · 1 comment

in Bailout Watch, Economy, Employment, Politics as Usual, Stimulus to Nowhere

The richest county in America, Loudoun County, Virginia, used money from the Obama administration’s $10 billion teacher-bailout program to give teachers a paid vacation. The Obama administration claimed the costly bailout was needed to prevent widespread layoffs of teachers, but few school systems ever planned layoffs, so now the $10 billion is being used on other things, some of them having nothing to do with teachers. The Washington Post notes that three months ago, “President Obama signed a bill including $10 billion to stave off what he and Democrats in Congress described as an impending nationwide teacher layoff crisis. . .’We can’t stand by and do nothing while pink slips are given to the men and women who educate our children or keep our communities safe,’ Mr. Obama said at a Rose Garden signing ceremony.”

As the Post notes, Obama’s claims were “the political equivalent of false advertising. . .The layoff threat was exaggerated and could have been mitigated by modest union concessions; in any case, the bill did not target states with the biggest budget problems. The fine print in fact allowed states to spend the money on practically any education employment-related purpose, up to and including salary increases.”

The state governments will never have to pay back any of this bailout money, which rewards them for irresponsibly increasing their employees’ pay much faster than inflation, to levels much higher than in the private sector. While millions of private sector employees have been laid off in the current recession, few government employees have been.

Earlier, Obama’s allies in Congress proposed spending billions to bail out mismanaged and underfunded union pension funds.  Think tanks tied to the Obama administration recently floated the idea of a new trillion-dollar mortgage bailout, for mortgages held by two mortgage giants.

Image credit: Adam_Thierer’s flickr photostream.

More Burdensome to Pay Rent Than to Be a Mortgage Deadbeat

by Hans Bader on November 28, 2010 · 1 comment

in Bailout Watch, Economy, Politics as Usual, Zeitgeist

Under government mortgage bailout/modification programs, the mortgage payments of many delinquent borrowers were cut to 31 percent of income, even for borrowers with high incomes and big houses. That cut was based on the false assumption that anything over that percentage was unaffordable (and perhaps even predatory lending). But people often pay far more than that in rent and mortgage payments, especially in prosperous regions like Washington, D.C. So mortgage deadbeats are sometimes getting their payments cut well below what their responsible neighbors have to pay — not merely getting relief from a bad deal.

“One in five renters and one in seven homeowners in the Washington area spend more than half their income on housing, according to census figures,” notes a recent Washington Post story.  Much of the population in the counties surrounding Washington, D.C. spent more than 30 percent: “In Fairfax County, for example, more than half the renters with household incomes of $50,000 to $75,000 spent more than 30 percent of their income last year to keep a roof over their heads,” as did “more than six out of 10 homeowners in that income bracket in Prince George’s and Prince William counties,” and “more than half” in Washington, D.C. itself.

Senior government officials, who mostly purchased their homes long ago, long before the housing bubble (and thus often have mortgage payments that are just a tiny fraction of their income), seem oblivious to this reality.

Many borrowers aren’t making any payments at all. They’re just defaulting on their mortgages, knowing that it will take years for the bank to evict them for non-payment: 492 days is the average number of days since the typical borrower in foreclosure last made a mortgage payment.  As law professor Glenn Reynolds notes, this all “seems calculated to make people who are struggling to make their payments feel like suckers.”

These mortgage bailout programs are harming the economy, say some economists and real estate experts.

I understated things a bit when I noted earlier that some mortgage deadbeats had their mortgage payments cut to just 31 percent of income. Actually, it’s lower than that. That 31 percent figure includes not just mortgage payments but also real estate taxes.  So if a delinquent borrower has a mortgage that’s 20 percent of income, and property taxes that are another 15 percent of income (for a total of 35 percent of income), that borrower could have gotten a reduction in mortgage payments under the 31 percent test, despite having a modest mortgage.

GM IPO Raises Billions, But Company Faces Hidden Challenges; Bailout Still Not Repaid

by Hans Bader on November 20, 2010 · 2 comments

in Bailout Watch, Economy, Energy, Labor, Legal, Regulation

General Motors raised more than $20 billion in an initial public offering (IPO) this week, selling millions of shares owned by the federal government, and reducing the government’s ownership of GM from 61 percent to 33 percent.

GM stock is worth money partly because its government ownership stake allows it to claim up to $45 billion in tax savings that it would otherwise have had to forfeit as a result of its bankruptcy. GM is also receiving lots of taxpayer subsidies for its Chevy Volt, despite recent revelations that it lied about that car, which it was trumpeting in a “publicity stunt” to curry favor with politicians crusading against global warming.

GM still owes taxpayers at least $29.4 billion, and its finance arm owes taxpayers an additional $14.6 billion. In a sense, taxpayers lost money on the sale. (They got at least $9 billion less for the stock that was sold in last week’s IPO than they originally paid for that stock.)

Slate’s Mickey Kaus, who reluctantly supported the auto bailouts, thinks that people who bought GM stock were “suckers,” since GM faces hidden perils, still has too much red tape and inefficiency, lacks “effective internal controls,” and is the beneficiary of accounting gimmicks and unrealistic assumptions about its future market share.

John Berlau, who studies financial markets at CEI, had a much more grim assessment of the GM bailout and its IPO.

Earlier, GM lied about whether it had paid back taxpayers for its bailout, triggering an FTC complaint by CEI.

Image credit: hanneorla’s flickr photostream.

Foreclosure Moratorium Would Impose Huge Losses on Taxpayers

by Hans Bader on October 27, 2010

in Bailout Watch, Economy, Legal

“Taxpayers and the federal government would be among the biggest losers if officials heed calls from some legislators and homeowners rights groups to stop millions of foreclosures across the country because of possible paperwork problems,” reports the Washington Times. “The Treasury Department is majority owner of one of the biggest mortgage companies, Ally Financial, formerly GMAC.”

“Despite much political posturing over improperly assigned foreclosure documents, ‘robo’ signatures and other irregularities . . . there does not appear to be any substantive questions’ about the legal rights of banks and investors to foreclose against long-delinquent homeowners in most cases,” said Ed Pinto, a mortgage analyst and former chief credit officer for Fannie Mae (a position he held back in the days before it began buying up and mislabeling vast numbers of subprime mortgage loans, leading to its current taxpayer bailout).

A moratorium would also impose huge losses on investors and retired people.  As noted earlier, if your 401(K) has shrunken recently, it may be due to falling bank stocks, like Bank of America stock, which has fallen from over $19 a share to less than $12 a share over the last six months.   Many if not most 401(K)s indirectly own Bank of America stock, through their mutual fund holdings.  Its stock value has fallen due to the possibility that paperwork errors and securitization may thwart repossession of homes though foreclosure.   Law professor Richard Epstein says a halt to foreclosures would be a disaster for “prudent borrowers and lenders,” while AOL’s Marty Robins says it would delay “economic recovery” and increase mortgage “interest rates.”  A news story illustrated the negative ripple effects of halting foreclosures.  Bank of America also reported a $10 billion loss due to restrictions on debit cards contained in the 2010 Dodd-Frank Act, restrictions that will also harm consumers.

Bailout of Fannie and Freddie Will Cost Double Earlier Estimates

by Hans Bader on October 22, 2010 · 5 comments

in Bailout Watch, Deregulate to Stimulate, Economy

The bailout of Fannie Mae and Freddie Mac will cost double earlier estimates, and could cost $363 billion over the next three years, report NBC and the Associated Press.

Fannie Mae and Freddie Mac are the corrupt government-sponsored mortgage giants that contributed to the mortgage crisis by engaging in fraud and misrepresenting subprime mortgages as prime.  Earlier, the Obama administration showered their executives with $42 million in pay, even as Obama’s pay czar was ordering productive private-sector banks to chop the pay of their executives and traders (leading one bank to dump a profitable trading operation), and imposing new taxes and burdens on private banks (but not Fannie and Freddie).

As Professor Roy C. Smith noted, because of the Obama administration’s attempt to restrict bank employee pay, “Citigroup agreed to sell its profitable Phibro unit at an extremely low price of only one or two times earnings in order to avoid having to pay a talented trader a $100 million contractual share of the profits he had earned. The most successful of the remaining employees of Citigroup, AIG and Bank of America have been given an incentive to leave their posts, and the firms will be constrained in hiring replacements.” Meanwhile, Bank of America’s stock has fallen over the last six months from over $19 to less than $12,  shrinking many Americans’ 401(k)s, as it has been injured by new rules and red tape such as the Dodd-Frank Act (which also is wiping out most free checking accounts).

While the taxpayers have lost a huge amount of money on the government-sponsored mortgage giants, they have actually made money on many private banks that accepted government bailout funds and then returned the money with interest.  (Healthy banks that never wanted a bailout and repaid their “bailout“ in full with interest, like BB&T, were pressured by the Treasury Department into accepting bailout money along with their unhealthy competitors, so that the public would not know which banks really needed a bailout; the Treasury Department feared that such knowledge would result in a run on those banks.)

General Motors’ Losses Hidden by Deferral of Union Pension Obligations

by Hans Bader on October 21, 2010

in Bailout Watch, Economy, Employment, Labor, Regulation

Any General Motors bonds issued this year will be classified as junk by a key ratings agency.  Why?  There’s some risk GM will go bankrupt again, and it hasn’t really returned to profitability, the way it appeared to have. That’s because GM’s recent quarterly profit, which came after years of losses and tens of billions of dollars in taxpayer bailouts, was artificially created by the temporary deferral of billions of dollars in pension obligations that it owes to the United Auto Workers union.  Those unfunded pension obligations have risen by $6 billion since the end of 2009.  As Charles Lane of The Washington Post notes,

[A] little-noticed October 6 report from Fitch, the ratings agency, which highlighted the major unresolved issue of the bailout: pension obligations to its United Auto Workers employees. The union successfully resisted efforts to trim this long-term burden on the company through the bankruptcy process, and they continue to weigh heavily on the company’s future. Specifically, GM’s relatively robust free cash position – one of its major selling points in its pending IPO – is being artificially propped up by the fact that it is not yet legally required to make multi-billion-dollar payments into its ‘heavily underfunded’ U.S. pension funds. How underfunded are they? Well, the U.S. plans alone are $17 billion underfunded as of the end of 2009, Fitch says. When you include global operations, the total is $27 billion. . . GM’s pension obligations are actually $6 billion higher than they appeared at the end of 2009.

These obligations will likely have far more impact on GM’s financial future than the recent revelations that it lied about the Chevy Volt, which it was trumpeting in a “publicity stunt” to curry favor with politicians crusading against global warming.

Earlier, GM lied about whether it had paid back taxpayers for its bailout, which resulted in GM getting $50 billion in taxpayer money, and its finance arm GMAC getting another $17 billion.  (GM also received billions indirectly from taxpayers, through programs like the incredibly wasteful Cash for Clunkers, which cost  used-car and car-parts dealers billions.)

The Obama administration used the bailouts to keep the United Auto Workers’ massive compensation (worth up to $70 an hour), pension benefits, and rigid union work rules largely intact, while giving the UAW a big chunk of General Motors‘ stock, even though the UAW helped bankrupt the company.  The auto bailouts were so wasteful and so biased in favor of the UAW that they disturbed even the liberal Washington Post editorial board.

Another reason for treating GM bonds as junk is the way the Obama administration mistreated GM’s past bondholders.  It engineered the wiping out of General Motors’ bondholders, some of whom were non-union employees who had invested their life savings in the company, so that the GM stock that the Obama administration was giving the UAW would be worth more.

GM also faces increased regulatory burdens, such as CAFE rules ratcheted up in the name of global warming  (the initial tightening of those rules will wipe out at least 50,000 jobs in the auto industry), that will make it hard for it to expand its anemic 19 percent market share.  Other EPA global warming rules are expected to wipe out at least 800,000 American jobs and impose heavy costs on suppliers of materials used in manufacturing automobiles.  The EPA’s proposed ozone rules would wipe out 7.3 million jobs, according to one study.

Timothy Geithner, Political Strategist

by Ryan Young on October 6, 2010

in Bailout Watch, Economy

The TARP bank bailout program polls poorly. Fifty-eight percent of Americans think the bailouts were unnecessary. Timothy Geithner, in recent remarks, subtly reminded voters that the hated bailouts were originally a Republican proposal. It began with George W. Bush, remember.

This is a clever bit of strategy from Geithner. President Obama and congressional Democrats get most of the blame for TARP. And they deserve plenty of blame for not repealing the program. But Geithner is right. TARP began with Republicans.

The midterm elections will probably be very kind to Republicans. Geithner is saying, in effect, “be careful what you wish for.”

He’s right. If the GOP does regain control of Congress, little good is likely to come of it. They will probably do a decent job opposing the White House’s proposals. That could slow spending growth.

But what the country needs are spending cuts. And Republicans have serially proven they can’t be trusted with the public purse.

When Republicans last held power they passed the largest new entitlement program since the Great Society, nearly doubled federal spending in eight years, gave billions of dollars in subsidies to businesses and farmers, and generally made a mess of things. The TARP bailouts and the largest spending stimulus in U.S. history were their closing flourishes.

Republicans  did all the things they ran against in 1994. Many GOP candidates are saying similar things in 2010. But remember Geithner’s counsel about TARP. Only a fool would believe that Republicans will actually cut spending. Beltway fever catches quickly. And it’s contagious.

Of course, Democrats are just as bad. As I say with every election involving Democrats and Republicans, whoever wins, we lose. The best that independents can do is nudge the intellectual climate in a better direction. Geithner has kindly reminded us that we need to redouble our efforts on conservatives and progressives alike.

General Motors Now Admits It Didn’t Repay Bailout Money

by Hans Bader on September 20, 2010 · 1 comment

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Energy, Labor, Legal, Mobility, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

Contrary to its claims in TV ads earlier this year, General Motors has now admitted that it did not repay its government bailout. In light of this new admission, the Competitive Enterprise Institute today filed a supplemental complaint with the Federal Trade Commission, drawing attention to this new information.

CEI’s original deceptive advertising complaint to the FTC, filed in May, noted that General Motors misleadingly claimed in a national TV ad that the company had paid back taxpayer bailout loans.  On September 16, 2010, General Motors admitted to the media that it did not in fact repay what it received from the government, and that its repayment of its bailout may take years:

It will take a couple of years for taxpayers to get back the billions they spent bailing out General Motors, but the company has a goal of returning the money, GM’s new CEO said Thursday. CEO Daniel Akerson told reporters that the government won’t be repaid with the company’s initial public stock offering, which could happen later this year, but couldn’t answer more specific questions about the sale.

In its original complaint, CEI urged the FTC to investigate the 2010 GM ad campaign entitled “GM Repaid Government Loan Ahead of Schedule.” The ad featured GM’s then-Chairman and CEO, Ed Whitacre declaring that “we have repaid our government loan in full, with interest, five years ahead of the original schedule.”

That claim, CEI explained in the May complaint, “gives the false impression that GM has used its own funds to pay back all the bailout money that it received from the federal government. In fact, GM has only repaid a fraction of those funds—barely ten percent. Moreover, GM apparently repaid its loan by using other federal funds.” Such misleading claims could dupe consumers into having excessive confidence in GM and its products and warranties.  CEI urged the FTC to investigate GM’s advertising claim, to “serve the American public on this issue of major consumer and taxpayer importance [and] “discourage other beneficiaries of government bailouts from falsely misrepresenting their status.”

> View the CEI Complaint of Deceptive Advertising by General Motors Company

> View the GM Ad on YouTube

To date, General Motors has “repaid” only $7 billion of the $50 billion it got from taxpayers — and used taxpayer money to make the purported “repayment.”  The only reason GM had enough government money to do that is because of Toyota’s recent safety issues and recalls, which drove car buyers away from Toyota to GM and Ford.  But that turning away from Toyota may only be temporary, now that the Toyota crashes turn out to have been caused by driver error.

In addition to the $50 billion, GM received billions in additional handouts through programs like the incredibly wasteful Cash for Clunkers (which cost taxpayers and used-car and car-parts businesses billions), and $17 billion given to its finance arm, GMAC — which no one expects GM to ever repay.

Ironically, GM would never have needed a bailout if it had just received relief from costly regulations such as CAFE rules (which wipe out at least 50,000 jobs) and dealer-franchise laws. That’s so despite GM’s self-inflicted wounds from mismanagement, excessive union wages and benefits (worth up to $70 an hour), and rigid union work rules.

The Obama administration left those wasteful work rules and excessive benefits largely intact, and gave the United Auto Workers Union (UAW) a big chunk of General Motors’ stock, even though the UAW helped bankrupt the company, and the company has value today only because the federal government pumped billions of taxpayer dollars into the company (and engineered the wiping out of General Motors’ bondholders, some of whom were non-union employees who had invested their life savings in the company).

Veteran political commentator Michael Barone called the Obama administration’s treatment of Chrysler and GM bondholders “gangster government.”  Law professor and bankruptcy expert Todd Zywicki called it an attack on “the rule of law.”

Back in 2008, Zywicki warned that a bailout might prove worse for the auto industry than for automakers to quickly file for bankruptcy without first seeking a bailout. Zywicki noted that by enabling automakers to get rid of expensive union contracts and red tape, a “Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.” It would provide “a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules.”  Nobel Prize winning economist Gary Becker also argued that a bankruptcy filing would have been better than a bailout in achieving “needed reforms.”

But the federal government ignored their wise advice, and chose to embark an incredibly costly bailout instead. The federal government used money from the $700 billion bank bailout for the auto industry bailout. Legal scholars at the Heritage Foundation, Clinton administration Labor Secretary Robert Reich, and many other commentators have argued that using the bank-bailout money for auto bailouts was illegal.

Obama’s Broken Pledge to Cut Wasteful Spending

by Hans Bader on September 16, 2010

in Bailout Watch, Deregulate to Stimulate, Economy, Politics as Usual, Sanctimony, Zeitgeist

When Obama was elected, he claimed he would “go through our federal budget– page by page, line by line–eliminating those programs we don’t need.” But as president, he seems to have forgotten about this pledge. The Cato Institute reminds him of it in a full-page advertisement in today’s Washington Post and other newspapers, identifying $525 billion he could cut annually from the federal budget by eliminating unnecessary or harmful programs.

For example, it notes that “Federal interference in housing markets has done enormous damage to our cities and the economy at large. HUD subsidies have concentrated poverty and fed urban blight, while Fannie Mae and Freddie Mac stoked the financial crisis by putting millions of people into homes they couldn’t afford. Getting the government out of the housing business will save $45 billion annually.” It also notes that “Federal workers enjoy far greater job security than their private sector counterparts—and far better total compensation: an average of $120,000 a year in wages and benefits. Cut federal compensation by 10 percent to save $20 billion annually.”

In 2008, Obama pledged to implement a “net spending cut,” but he has instead exploded government spending.  Federal domestic spending increased by a record 16 percent in 2010.  In 2010, the Congressional Budget Office concluded that “President Obama’s policies would add more than $9.7 trillion to the national debt over the next decade.”

The Obama administration’s housing spending is particularly wasteful.  It is now using regulations and billions in tax dollars to promote more of the risky lending that led to the financial crisis.  It is ratcheting up affordable-housing mandates that created markets for junk sub-prime mortgages (thus spawning the mortgage meltdown, as even the liberal Village Voice has conceded), and it is increasing regulatory pressure on banks to make risky loans.  A $75 billion federal mortgage bailout program harmed the very real estate markets it was supposed to help.

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