TARP

Taxpayers Absorb Berkshire’s Dumped Bank of America Shares

by Kathryn Ciano on February 15, 2011 · 1 comment

in Economy

Late yesterday afternoon Warren Buffett’s trading conglomerate Berkshire Hathaway dissolved all of its Bank of America shares. Berkshire’s pull-out accounted for 5 million shares — not an enormous amount, but a 100 percent dump nonetheless sends a strong signal to the market.

Berkshire is up $4B this quarter over last — their formula is working. Along with Bank of America, Berkshire dumped shares in Comcast, Nike, Lowe’s, and a few other holdings.

I wrote:

In an interview released last week, the Financial Crisis Inquiry Commission quoted Buffett as criticizing Bank of America for paying a “crazy price” to acquire Merril Lynch in the midst of a financial crisis.

Until an audit subjects the Federal Reserve to transparent decisionmaking, private investments point a clearer path to what paths the public expects will be profitable in the years to come. The Fed may shift interest, but Berkshire Hathaway deals in real dollars.

Cross your fingers for Chevy’s Volt, kids, because BofA is one national investment looking dismal this week.


This is just one more way taxpayers will bear the burden of keeping banks afloat. When Congress first approved TARP last year, Treasury was slated to buy mortgage-backed securities from the banks.

The government ultimately deemed it impossible to assess securities’ values. Instead Treasury used TARP to inject free cash flow into banks by purchasing convertible bank shares — effectively bank stock options.

As banks’ losses mount and real estate prices continue to drop the banks have been unable to push these deadweight securities from their balance sheets. Banks have accepted government cash but have not been able to match that influx with equity.

Banks that do not react to investors’ cues do not adequately protect themselves from further government ownership. Last spring the three big American banks converted government-owned stock from preferred to common. Ostensibly this move protected public resources (tax dollars gov’t used to snatch up bank shares in the first place) by paying less per share but continued to “bail out” the banks stuck absorbing our securities failure.

Government holding isn’t about ownership; it’s about control. When government dollars go to preferred stock, banks monitor what Big G owns and how many dollars are going to and from this significant stockholder. When Big G pulls out of preferred and keeps instead to common, the banks are less attentive to exactly how much the gov’t owns.

The more government hands get involved, all of its influence falls victim to mission creep. When gov’t dollars go to common stock instead of preferred, it’s not like the gov’t pulled out some of its cash to match the lower equity it was purchasing. Instead, the same number of G dollars are still flowing to the banks, but holding many more shares.

The Federal Reserve was invented to counterbalance market shifts and dips. That’s the only enterprise big enough to control for inflation.

When taxpayers have to absorb yet another private investor’s signal that BofA is flailing, that’s not inflation, that’s government failure.

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.

Jobs: Created, Not Made

by Kathryn Ciano on October 12, 2010

in Bailout Watch, Economy, Employment

Welcome to October, the start of a new government fiscal year. 2010 was the year of “jobs created or saved.” Bank and business bailouts may have begun long before this year, but 2010 saw what effects flow from nationalizing big business.

Now that the budget says 2011, what has the government done for the individual this year? Despite hundreds of billions of stimulus dollars flooding the economy, unemployment remains in double digits.

In February Treasury Secretary Tim Geithner called the government’s economic efforts “inadequate,” noting that the administration needed to “fundamentally reshap[e] the government’s program to repair the financial system.”  Geithner, a human Laffer curve of robust tax irresponsibility, is the most egregious bailout proponent remaining in Obama’s cabinet.
Business is not like government.

Geithner’s mentality lends itself well to growing government. Geithner’s mentality would not last a year in business.

Government is comprised of millions of people with billions of priorities. Business reflects a single priority: Maximizing the bottom line.

Groups involved with government cooperate only inasmuch as they can agree. Groups involved with business quickly learn to cooperate at all times, because the moment it costs a business more to keep an employee than to fire him, he will be fired.

Similarly, for a business to hire a new employee, that company’s bottom line must benefit from the hire. If it costs $20,000 to hire a new employee, the business will only hire if it anticipates earning $20,001. If the bottom line cannot support the cost of a new worker, she simply will not be hired.

Funds alone cannot generate jobs. As with any financial interaction, money is only as good as the probability of your being able to use it. When dollar hopefuls are very uncertain about their ability to use money in the future, they save it. Businesses are not like government; they are risk averse.

If the government wants more people to be employed, it should get as far away from the hiring process as possible. Only when a business can assess its finances and capabilities can it make a real determination as to how much a potential new employee is worth.

When government keeps fiddling with the works — flooding business competitors with funds, levying ominous health care costs on certain business sizes, and nationalizing some sectors but not others, businesses have no choice but to freeze.

Market uncertainty makes it impossible for businesses to make decisions. The convoluted health care revolution is convoluted enough on its own to freeze the private sector pipes; add pending financial regulations, taxes, and laws that are indecipherable even to the regulators who write them. Even Nancy Pelosi admits we need to pass the bill, subjecting it to interpretation, before we can “find out what’s in it.”

Just like so much sausage, even once we pass the bill we don’t know where it comes from. To “stimulate” the economy with one dollar, the government must first take it from the people.

Printing new money for economic stimulus is even worse — this deflates the value of each dollar, so prices rise the middle class disintegrates. Printing money was a favorite of the depression-era German government, and led to Germans pushing wheelbarrows full of marks and boiling wallpaper for dinner in the early 1930’s. This hardly fosters job growth or stable politics, though Germany is okay now, I suppose.

Since the Obama administration recognized a recession in early 2009, the government has taken nearly $3 trillion dollars out of the economy and has promised nearly $11 trillion more in government programs. In that time the American economy has shrunk by over nine million jobs.

Government by definition operates at a loss, funded by takings and the future. Businesses do not have that luxury. Government attempted to save the private sector by tapping individuals’ wallets. When that was not enough, government nationalized businesses to tap their savings too.

Until businesses can make reasonable predictions about the future, they will not invest in new hires. The best thing the government can do to help the economy is to get out of the way.

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.

Automakers Face Potentially Massive Race-Discrimination Class-Action Lawsuit Thanks to Obama Administration

by Hans Bader on July 23, 2010

in Bailout Watch, Economy, Employment, Legal, Nanny State, Odds & Ends, Personal Liberty, Politics as Usual, Regulation, Sanctimony, Zeitgeist

“Decisions on which car dealerships to close as part of the auto industry bailout — closures the Obama administration forced on General Motors and Chrysler — were based in part on race and gender, according to a report by Troubled Asset Relief Program Special Inspector General Neal M. Barofsky: ‘Dealerships were retained because they were recently appointed, were key wholesale parts dealers, or were minority- or woman-owned dealerships.’ Thus, to meet numbers forced on them by the Obama administration, General Motors and Chrysler were forced to shutter other, potentially more viable, dealerships. The livelihood of potentially tens of thousands of families was thus eliminated simply because their dealerships were not minority- or woman-owned.”

It’s likely that these race-based closures of auto dealerships violated Supreme Court rulings like Adarand Constructors v. Pena (1995), which say that the federal government can’t use race except to remedy the present effects of its own past discrimination, as I explain below. What this means is that terminated dealers could bring a billion-dollar class-action lawsuit challenging the use of race under 42 USC 1981 and the Constitution, based on cases like Gratz v. Bollinger (2003) (that Supreme Court decision let white college applicants bring a reverse-discrimination class action over a university’s use of race as a factor in admissions, even though it’s seldom clear in such cases exactly which white applicants would have gotten admitted if race hadn’t been used to admit some minorities).

This is just the latest harm the Administration has inflicted on automakers and dealers.  Its incredibly wasteful Cash-for-Clunkers program cost taxpayers and used-car and car-parts businesses billions, and drove up the cost of car-parts and used cars for dealers and consumers alike.

It doesn’t look like the automakers and the government have a valid defense to any lawsuit over the race-based car-dealership closures. There doesn’t seem to be any pattern or practice of discrimination against minorities in the auto industry that could conceivably have justified the use of race as a remedy under the Supreme Court’s Adarand decision (indeed, the automakers have long had affirmative action programs that provide a leg up to minority businesses), and in any event, the Obama administration doesn’t seem to have had any such remedial rationale in mind for using race. If it didn’t have a remedial rationale in mind for the closures, it can’t rely on one later, according to the Supreme Court’s ruling in Shaw v. Hunt (1996). And it can’t rely on a “diversity” rationale for using race (except in universities), according to federal appellate court rulings like Lutheran Church–Missouri Synod v. FCC, 141 F.3d 344 (D.C. Cir. 1998) and Messer v. Meno, 130 F.3d 130 (5th Cir. 1997). The government may be able to invoke sovereign immunity to limit any such liability to the terminated dealers, but the automakers won’t.

(Ironically, Cash-for-Clunkers, which was designed as welfare for the automakers, actually did virtually nothing for the U.S. automakers it was supposed to help, since it simply shifted auto purchases earlier, encouraging  Americans to buy cars earlier (during the program)  rather than later (after the program ended).  Indeed, it may actually have harmed GM and Ford, since their market share was lower during Cash-for-Clunkers than later on, when car buyers were turned off by Toyota’s safety recalls and bought more GM and Ford vehicles than before.  People who participated in Cash-for-Clunkers bought lots of Toyota vehicles as replacements, which did nothing for the U.S. automakers.)

Media Give Disgraced Politician Eliot Spitzer a Soapbox to Lecture the Public

by Hans Bader on June 4, 2010

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

Eliot Spitzer, who was forced out as Governor of New York after paying prostitutes tens of thousands of dollars and then violating federal finance laws in trying to cover it up, is now apparently going to replace respected journalist Campbell Brown in a prime slot on CNN.  Earlier, the leading liberal website Slate hired him as one of its financial commentators.

As attorney general of New York,  Spitzer was an overbearing, hypocritical bully who used the threat of prosecution and lawsuits to force profitable companies to dump their highly-competent CEOs, resulting in declining profits and losses to shareholders at companies like AIG, which the taxpayers later bailed out at a cost of $170 billion.

Spitzer is just the latest liberal crook given a soapbox by the liberal media.  The Washington Post just gave former auto czar Steve Rattner space to boast about the supposed success of the auto bailouts, even as the SEC was moving to ban him from Wall Street for three years because of his unethical conduct.  (Rattner whined about how critics of the bailout like Senator Charles Grassley, who exposed how General Motors was using taxpayer money to make a phony “repayment” of part of what taxpayers gave GM, were “elasticizing the facts,” even though the government’s own inspector general for the TARP bailout program confirmed what Senator Grassley was saying.)

And the Washington Post earlier gave former Fannie Mae head Franklin Raines a soapbox to lecture Fannie Mae’s critics, after he was fined for massive accounting fraud at Fannie Mae, which had to be bailed out by taxpayers shortly afterwards thanks to the risky practices he promoted.

As I noted at the time in a letter to the editor, “Mr. Raines stepped down as Fannie Mae’s CEO after a ‘$6.3 billion accounting scandal’ that rivaled Enron’s; in a settlement with the government, he and other Fannie Mae executives agreed to pay fines and forgo millions in stock, pension and other benefits. . .Yet The Post gave Mr. Raines a soapbox to make the same arguments against reforming Fannie Mae that he and Fannie’s lobbyists have made for years. Mr. Raines, a liberal power broker, derided “ideologues in the Bush administration” who, he said, tried to “undermine” Fannie Mae. Those officials were in truth warning about Fannie Mae’s risky practices.”

The Obama administration earlier lifted a $400 billion limit on bailouts for Fannie Mae and Freddie Mac, two mortgage giants known as the Government-Sponsored Enterprises (GSEs).  “Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie,” reports The New York Times.

Fannie and Freddie helped spawn the 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.” They paid their CEOs millions, and engaged in massive accounting fraud–$6.3 billion at Fannie Mae alone–to increase the size of their managers’ bonuses. As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

The Obama administration refuses to reform these mortgage giants, saying it is “too hard” to do. Earlier, Senate Democrats blocked reform of the mortgage giants in a party-line vote.

(Obama received $125,000 in contributions from these mortgage giants as a Senator, second only to the corrupt Senator Chris Dodd, who is retiring this year due to his financial scandals. Dodd is the chief drafter of the financial “reform” bill.)

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

The federal government has sunk over $50 billion into General Motors itself, $17 billion more into its finance arm GMAC, $15 billion into Chrysler, and spent billions more on the wasteful cash-for-clunkers program and pension bailouts for GM spin-offs.  Even if GM manages to recover, taxpayers will never get most of this money back.   (Taxpayers may get back some of the money sunk directly into GM itself, in an IPO, if all goes according to plan; but the remaining money sunk into related entities, and indirectly used to prop up GM, will never be repaid, even if GM recovers.)

Even if GM recovers, it will not be because of its ability to fairly compete (the Obama administration used the bailout to protect excessive union wages), but rather because of good luck (Toyota’s recent safety issues have driven car-buyers away from it to GM and Ford) and special favors from the government (the Obama administration artificially reduced GM’s costs by ripping off bondholders who had loaned the company money, and dumping costly pension obligations of GM spin-offs onto taxpayers).

Obama Administration Rewards Corrupt Mortgage Giants, Punishes Productive Private Banks, Fleeces Taxpayers and Responsible Credit Cardholders

by Hans Bader on March 10, 2010 · 3 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Energy, Environment, Labor, Mobility, Natural Resources, Politics as Usual, Precaution & Risk, Regulation, Sanctimony

The Obama administration wants to increase taxes on productive banks that are self-supporting, while exempting the mortgage giants and other companies that got massive taxpayer bailouts.  For more details, click on this graph, “Bank-robbing tax lets ‘bad guys’ go free,” courtesy of a Washington think-tank, the Heritage Foundation.  It shows that the mortgage giants Fannie Mae and Freddie Mac are exempt and will never have to pay a dime, despite being bailed out by taxpayers at a cost of more than $200 billion, while Bank of America and Wells Fargo, which are solvent and returned all their TARP money, would be forced to pay billions under the administration’s proposed tax.

General Motors and Chrysler won’t have to pay a dime, either, even though the government claimed they were “financial institutions” just like banks in order to use bank bailout money to bail them out at a cost of at least $70 billion (a bailout that would not even have been needed to save the companies if they had simply been reformed to make them competitive, and received relief from burdensome red tape, like poorly-drafted CAFE and global-warming regulations that may backfire.  Instead, the Obama administration effectively gave the companies, at taxpayer expense, to the UAW, a powerful union opposed to much-needed reforms).

In other news, economists and real estate experts say that a mortgage bailout program the Obama administration spent $75 billion on has backfired and harmed the real estate market.

Obama recently expanded the bailout of mortgage giants Fannie Mae and Freddie Mac and lavished money ($42 million) on their CEOs.

Under the Bush administration, federal regulators took over Fannie and Freddie in the name of stopping their risky practices. But the Obama administration has increased their purchases of risky mortgages in a vain attempt to inflate the economy. Worse, it forced them to run up to tens of billions in losses to bail out deadbeat and at-risk mortgage borrowers, and then tried to conceal those losses, in conduct reminiscent of Enron.  But their management hasn’t objected, because the costly requirements are accompanied by massive taxpayer bailouts and lavish pay for the mortgage giants’ CEOs.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and 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.”

Why did they buy these risky loans?  They put up with Clinton-era affordable-housing regulations that required them to buy up lots of risky loans, in order to curry favor on Capitol Hill and thus retain their annual $10 billion in tax and other special privileges (which they possessed owing to their status as “Government-Sponsored Enterprises” or GSEs). They paid their CEOs millions in the process, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As GSEs, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

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

Under Obama’s proposed financial “reforms,” banks will be pressured to make even more risky, low-income loans. Obama has sent to Congress his proposal to create a politically correct entity called the Consumer Financial Protection Agency, tasked with enforcing the Community Reinvestment Act. Government pressure on banks to make low-income loans was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s proposals would empower the new agency to enforce the Community Reinvestment Act, which was a key contributor to the financial crisis, without regard for banks’ financial safety and soundness.

Moreover, Obama’s proposed financial rules do absolutely nothing to reform Fannie Mae and Freddie Mac, admits Treasury Secretary Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Meanwhile, a new law backed by the Obama administration, the CARD Act of 2009, has effectively forced responsible credit-cardholders to subsidize irresponsible people, leading to the return of annual fees on many credit cards, and the elimination of many cash-back and rewards programs.  My wife, who has an excellent credit rating, was recently informed that one of her cards will now have an annual fee — of $60!  (She promptly canceled the card.)

Increase small biz lending not gov spending

by Michelle Minton on February 16, 2010

in Bailout Watch, Deregulate to Stimulate, Economy, Politics as Usual, Stimulus to Nowhere

President Obama seems to genuinely want to help people and improve the economy. However, he also seems to genuinely believe that the best and most effective way to accomplish these goals is through government intervention and wealth redistribution. In his State of the Union address, President Barack Obama pinpointed several particular policy-goals, one of which was to stimulate increased lending to small businesses. How does Obama propose to encourage such lending? Someone with a different perspective might look for ways to remove regulatory barriers to increase lending, but President Obama’s plan is to simply shuffle $30 billion in TARP funds to community banks, no doubt with many strings attached.

However, there’s a much simpler way to increase small business lending, one that requires zero taxpayer dollars and presents no risk to the financial system: allow credit unions to increase their lending to small businesses and low-income residents.

Throughout the economic crisis, while banks and other financial institutions withdrew lines of credit and gave questionable bonuses to their executives, credit unions have continued to lend. They could lend even more if not for the regulations that prevent them from doing so.

Like banks, credit unions offer a mix of financial services, including checking and savings accounts (credit unions  call them “share accounts”), credit cards, and loans. However, credit unions differ from banks in that they are limited to serving a specific consumer base, known as their “field of membership.” This could be defined as the employees of a company, residents of a defined geographical region, or members of a church.

Credit unions are also more limited than banks on the types of loans they are allowed to write and the rates that they may charge. Additionally, credit unions are non-profit organizations that do not seek to generate a profit and do not pay federal income taxes-any returns earned from member business lending is returned to the members or used for the operation and growth of the credit union.

Credit unions have been fighting for a decade to lift the cap on the amount of lending that they are allowed to engage in. As recently as September 2009, the Credit Union National Association issued a letter to the president asking for him to support a measure in Congress that would life the cap on credit union business lending from 12.25 percent of their assets to 25 percent and that would allow them to include “underserved” areas as part of their field of membership. The bill, the Promoting Lending to America’s Small Businesses Act of 2009 (HR 3380), has been stuck in the House Financial Services Committee since July 2009.

Increasing credit unions’ ability to lend will not solve all of our economic woes-they control only around 6 percent of the country’s total deposits. However, freeing up credit unions to use their capital to stimulate and sustain small businesses can only help, and it will have a significant impact on areas of the country underserved by banks, at no cost to the taxpayer.

If Congress and President Obama are serious about increasing access to credit right away, they should focus less on redistributing taxpayer dollars and more on freeing the institutions that have capital and want to lend to small businesses.

The Financial Crisis Made Easy, Radio Edition

by Evan Banks on December 21, 2009

in Bailout Watch, Economy, Odds & Ends, Stimulus to Nowhere

Some of OpenMarket.org’s readers may know that I’m in the middle of earning a Master’s of Journalism here in D.C. I’m concentrating in Broadcast and Online Production, and for those concerned that journalism is dying a slow death, I’m living proof that a new generation of journalists are being bred with the Internet in mind–but that’s another story for another day.

As one of the requirements of a Public Affairs Reporting class, I’ve written a piece on last year’s financial crisis specifically exploring the role of the Federal Reserve and the Community Reinvestment Act and attempting to give, in layman’s terms, a reasonable account of what happened that the average person would be able to understand.

I’m a firm believer that one should not have to be a banker to make sense of the financial crisis, and as a journalist I have to concede that news organizations could and should have done a much better job explaining what happened. Unfortunately, it seems that when it comes to explaining things like collateralized debt obligations, credit default swaps and market derivatives it’s far easier to revert to intellectual sloth, blaming greedy investors and “capitalism gone wild.”

I’ve reproduced the piece’s script, which was designed for a radio broadcast, here in its entirety, complete with its anchor introduction and cueing (and yes, all good broadcast reporters write their own introductions). You’ll have to forgive some of the elements of the broadcast style (such as putting a source’s title before their name), but one of the advantages of the format is its clear, concise points and fast pacing. This story would be about five minutes long if it were played on the air. And as a side note, even though I work at a think-tank, I’ve tried to make the piece as politically neutral as possible.

The Financial Crisis Made Easy

Anchor1: The Federal Reserve is coming under closer scrutiny for its actions during last year’s credit crisis.

Anchor2: Experts are also taking a closer look at a law that makes it easier for low-income families to get home loans.

Anchor1: As Evan Banks reports, some are saying that the Fed and the Civil-Rights era law played a major role in last year’s financial crisis, while others blame greedy investors and bankers for the housing bubble.

—

Federal Reserve Chairman Ben Bernanke may be saying that the recession is over, but there is still much debate over what caused last year’s crisis in the first place.

Some are saying the central bank itself was at the root of the crisis.

Established in 1913 by Woodrow Wilson, the Fed’s duties include monitoring and managing the nation’s money supply and setting interest rates by buying and selling government-backed bonds.

Its end goal is to create and maintain a stable economic setting for private commerce to flourish.

However, economist Steven Horwitz believes that by artificially lowering interest rates after nine-eleven, the Fed overstimulated the housing market.

SOT (stands for sound on tape) (:10) “Look at the banking industry like a traffic light at an intersection. When the lights turns red, banks don’t lend. The Fed, through monetary and fiscal policy, makes all the lights turn green.”

Horwitz says that the only problem with green lights all the time is that eventually it causes a traffic accident.

As more and more people bought homes at low interest rates, home values skyrocketed, creating a housing bubble that burst last year.

The resulting sharp decline in home values was the trigger that brought the nation’s banking system to its knees last fall.

Some say that the Community Reinvestment Act, a law passed in 1977, also contributed to the crisis.

The law is the culmination of an effort to stop discrimination in loans made to low-income individuals and businesses, a practice known as redlining.

However, the Competitive Enterprise Institute’s Michelle Minton says that as the Community Reinvestment Act matured in the mid-nineties, it’s scope and regulatory powers broadened.

SOT (:17) “The Community Reinvestment Act was an attempt to strong arm banks into going against their better judgment and writing loans without thinking about the profit consequence. The game really changed as the feds made CRA compliance a requirement for bank mergers.”

Minton says that the law encouraged banks to make risky loans to individuals that couldn’t pay the money back—individuals the banks would not otherwise have loaned to.

When these high-risk individuals couldn’t pay back their mortgages and the banks repossessed their homes, the entire system came crashing down like a set of dominoes.

With fewer people paying their mortgages and banks unable to re-sell more and more foreclosed houses, property values across the board dropped.

For many homeowners it made increasingly less sense to continue paying off a loan that was higher than their house was worth.

Combine falling home values with so-called ninja loans- loans requiring no proof of income, no job, and little or no down payment on the home, and the recipe was perfect for walk-outs and abandoned homes.

Finally, as a direct result of mortgage revenues drying up, investors and banks across Wall Street that had heavily invested in real estate started going belly-up.

With investments, retirement plans and stocks dropping across the board, the crisis hit home and came full-circle.

Former Chair of the Federal Housing Board Bruce Morrison points a finger directly as these risky lending practices, saying they inevitably lead to defaulting mortgages.

He warns against policy-driven lending:

SOT (:15) “Deciding that risk doesn’t exist because you have an objective is a really bad thing to do, and so we need to learn about risk and how to measure it better than we have and have more honest discussions about which risks we ought to take and who are to take them and who will underwrite them.”

On the other hand, the National Community Reinvestment Coalition’s John Taylor says that it’s silly to blame poor people for bursting the nation’s housing bubble.

Taylor points out that the housing crisis affected everyone, not just the poor and minorities:

SOT (:07) “You’d be surprised at the whiteness of these people. This was not just about minority communities.”

The Federal Reserve’s response to the crisis involved authorizing the Treasury to print large amounts of new money and lowering the interest rate even further.

The Fed also stood behind former President Bush’s Troubled Asset Relief Program, the national plan to bail out banks deemed by the Fed to be “too important to fail.”

Last week Citigroup returned the remainder of unused TARP funding along with its loaned federal monies, making it the last Wall Street bank to exit the program.

Some, though, are still wary of a society that makes liberal use of credit and bailout money.

Stamm Mortgage Management founder Mark Stamm says that he fears a future where contracts and loan obligations are meaningless.

He says that a bailout mentality will cripple the American economic apparatus in the end, perhaps irrecoverably:

SOT (:12) “That’s going to be the biggest bad thing that happens as a result of this. credit cards? You don’t really need to pay ‘em. Mortgages? You don’t really need to pay ‘em.”

Regardless of whether the Community Reinvestment Act, the Federal Reserve, both, or neither was at fault in last year’s financial fiasco, both sides agree that public regulators and private banking firms must be more transparent in their mortgage dealings.

A bill introduced by Texas representative Ron Paul that would audit the Federal Reserve is currently going through a committee and has 317 cosponsors.

Paul’s Federal Reserve Transparency Act of 2009 would allow Congress and the American public to see, for the first time in history, the day-to-day decisions on the Fed’s books.

At this time no efforts are being made to repeal or change the Community Reinvestment Act.

Evan Banks, [news organization here].

Fixing TARP: Is Transparency Enough?

by Ryan Young on November 16, 2009

in Bailout Watch, Economy, Features, Regulation, Zeitgeist

The House is voting today on a bill to improve transparency in the TARP bailout program. TARP is, shall we say, rather opaque. 25 different agencies administer TARP funds. Each one uses different accounting standards. Keeping track of everything is almost impossible.

I wrote an article not too long ago saying that transparency is welcome symptomatic relief. But TARP itself is a disease. The only way to cure the disease of bailout programs is to abolish them. Russ Roberts said much the same thing:

[C]apitalism is a profit and loss system. The profits encourage risk-taking. The losses encourage prudence. If the taxpayer almost always eats the losses for the losers, you don’t have capitalism. You have crony capitalism.

Transparency is a good start. But the goal should be to not have government bailing out politically favored companies in the first place.

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