Half of the Money Came Back; Where is the Crisis?

We got half of India back today. Yesterday we had a 777 point decline in the DOW and the naysayers said we lost the amount of weatlh equivalent to the entire GNP of India. That was all because the House of Representatives voted down the outrageous bailout plan proposed by the Sec. Paulson at the US Treasury, Sen. Dodd of D-CN and Rep. Frank, D-MD.

Stocks staged a broad recovery on Tuesday after Monday’s big sell-off. The Dow Jones industrials gained 485.21 points or 4.68 percent, to 10,850.66, halving the 777-point decline on Monday. New York Times, Sept. 30, 2008.

You will not hear a peep that half of the GNP of the nation of India rolled back on to accounting ledgers today. Yep, ½ a Trillion Dollars back in the bank. If it keeps coming back, soon it might add up to real money.

This Blog is designed to follow this elephantine change in real estate mortgage law and not merely track the polarization of the Wall Street Bailout. However, the entire world was silent today on real estate developments. Perhaps it’s Rosh Hashanah; perhaps it’s a slow news day.
It appears that the Democrats and the Republicans are back in the workshop crafting new bills to submit to Congress. I don’t have a crystal ball (well, not in politics), but my guess is the Administration and the Democrats (hard to believe the White House and Rep. Pelosi are on the same page) will not be able to turn the House Republicans. They probably can turn the defecting House Democrats with enough sugar in a new bill. My guess is that that new incentive will be: 1) allow some % of the profit off the bailout (when the toxic assets are sold at a profit) to be funneled back into affordable housing (originally set at 20%), 2) grant Bankruptcy Judges the right to modify (smash: rewrite) terms of mortgages as they see fit, and 3) allow court review of the Secretary of the Treasury’s actions. Court review was lacking in the Administration’s proposal. Imagine that.

It’s a fair bet something will happen. Whatever comes out of Congress should please our long lost friend, Marx. The Fifth Plank of a small Manifesto he wrote in 1848 demands: “Centralization of credit in the hands of the State.” Go for it Karl, you are almost there.

Hugh Wood, Atlanta, Georgia

PostScript: After this was written, the Administration proposed the following “additions,” to the Bill to be introduced into the Senate. “It included AMT relief, $8 billion in tax relief for those hit by natural disasters in the Midwest, Texas and Louisiana, and some $78 billion in renewable energy incentives and extensions of expiring tax breaks. In a compromise worked out with Republicans, the bill does not pay for the AMT and disaster provisions but does have revenue offsets for part of the energy and extension measures.” AP September 30, 2008.

Downturns Are Nothing New: Consider These from the 19th Century

The Panic of 1901

On May 17th, 1901 the New York Stock Exchange crashed. The Panic of 1901 was a stock market crash caused in part by struggles for the financial control of the Northern Pacific Railroad. The stock cornering for control was orchestrated by James Stillman and William Rockefeller's First National City Bank financed with Standard Oil money. After reaching a compromise, the moguls formed the Northern Securities Company. As a result of the panic thousands of small investors were ruined.

The Panic of 1896

The Panic of 1896 was an acute economic depression in the United States that was less serious than other panics of the era precipitated by a drop in silver reserves and market concerns on the effects it would have on the gold standard. Deflation of commodities prices drove the stock market to new lows in a trend that only began to reverse after the 1896 election of William McKinley. The failure of the National Bank of Illinois in Chicago is remembered as one of the motivating factors in the sensational Adolph Luetgert murder case. During the panic, call money would reach 125 percent, the highest level since the Civil War.

The Panic of 1893

The Panic of 1893 was a serious economic depression in the United States that began in 1893. This panic was an extension of the Panic of 1873, and like that earlier crash, was caused by railroad overbuilding and shaky railroad financing which set off a series of bank failures. Compounding market overbuilding and a railroad bubble was a run on the gold supply and a policy of using both gold and silver metals as a peg for the US Dollar value. The Panic of 1893 was the worst economic crisis to hit the nation in its history to that point. To put this event in context, the period of economic crises known as the Long Depression (1873-1896) was worse than the Great Depression of the 1930s.

The Panic of 1884

The Panic of 1884 was a short-lived small economic downturn. Gold reserves of Europe were depleted and the New York City national banks, with tacit approval of the U.S.Treasury Department halted investments in the rest of the United States and called in outstanding loans. A larger crisis was averted when New York Clearing House bailed out banks in risk of failure. Nevertheless, the investment firm Grant & Ward, Marine Bank of New York, and Penn Bank of Pittsburgh along with more than 10,000 small firms failed.

The Panic of 1873

The Panic of 1873 was a severe nationwide economic depression in the United States that lasted until 1879. It was precipitated by the bankruptcy of the Philadelphia banking firm Jay Cooke on September 18, 1873, following the crash on May 9, 1873 of the Vienna Stock Exchange in Austria. In September 1873, the American economy entered a crisis. This followed a period of post Civil War economic overexpansion that arose from the Northern railroad boom. It came at the end of a series of economic setbacks: the Black Friday panic of 1869, the Chicago fire of 1871, the outbreak of equine influenza in 1872, and the demonetization of silver in 1873.

The Panic of 1869 (Black Friday)

Black Friday, September 24 1869, also known as the Fisk-Gould Scandal, was a financial panic in the United States caused by two speculators' efforts to corner the gold market on the New York Gold Exchange. It was one of several scandals that rocked the presidency of Ulysses S. Grant. During the American Civil War, the United States government issued a large amount of money that was backed by nothing but credit. After the war ended, people commonly believed that the U.S. Government would buy back the "greenbacks" with gold. It did not; speculation in gold caused dumping of hoarded gold and, thus, the panic.

The Panic of 1819

The Panic of 1819 was the first major financial crisis in the Constitutional United States, after the depression of the late 1780s under the Articles of Confederation (which led directly to the establishment of the dollar and, perhaps indirectly, to the calls for a Constitutional Convention). It resulted in widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing. It marked the end of the economic expansion that had followed the War of 1812. However, things would change for the US economy after the Second Bank of the United States was founded in 1816, in response to the flood spread of bank notes across United States from private banks, due to inflation brought on by the debt following the war. © Wiki

Hugh Wood, Atlanta, Georgia

Stunning Reversal: Bailout Fails in House 228-205

Wow. Is the Office of Financial Stability (OFS) doomed to go into the History Books as the League of Nations? The savior that almost was?

There is no such thing as a “sure thing.” Maybe I should delay calling the US Financial System, the USSR Financial System, Comrade. In a truly stunning turn of events, the House of Representatives said “No,” to the largest bailout-spending bill in the history of the United States. (Yea. Sort of.)

While I do not have the citations, I “heard” on talk radio that House emails were running many multiples of “no,” to “yes.” It may be that the “folks at home” in the House Districts got to the House Representatives merely five (5) weeks before the election. Remember, Constitutionally, the House holds the purse strings and its members have to stand for election every cycle. Theoretically, the House is the most accountable.

What a mess. Everything we have written for the last two weeks is now on the electron room cutting floor. The all but assured emergence of the OFS looks somewhat unstable.

I do not put it past the powers that be in Washington to reconvene and put this “bad boy” to another vote. If not, be prepared to sell some “apples,” in your banker’s suit. The equities are going to take a steep ride down before they level off. So far, the DOW tanked 777 points (7%) today.

Hugh Wood, Atlanta, Georgia

Mortgage Modification by Federal Mandate is Coming

Image © WSJ, 2008.

The Emergency Economic Stabilization Act of 2008 (EESA)

The Associated Press (AP) reported today that the Plan issued on Sunday, September 28, 2008, included bailout language: "To help struggling homeowners, the plan requires the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers' monthly payments so they can keep their homes." AP.

Section 109 of this Plan (which was Section 108 when the Plan was first written), sets out a huge Federal Renegotiation effort of all subprime mortgages, by the Federal Government, that become associated with this bailout effort.

While it is somewhat unclear how the Office of Financial Stability (OFS) will engage lenders to renegotiate prior to foreclosure - It is going to happen. Under the current structure in preforeclsoure loss mitigation, borrowers and lenders engage (if the borrowers choose to participate - many borrowers just run away and ignore the problem) in renegotiation credit review and "loss mitigation." If the borrower can come up with a payment plan that makes since for the lender (the incentive here is that the lender does not acquire and unsalable REO property) and the borrower can pay less onerous terms, the parties will enter into a loss mitigation contract. Notice that they do not change the terms of the underling mortgage. Instead they enter into a contact that sits on top of the mortgage. If the borrower breaches the contract - they lender reactivates the foreclosure.

Under new government sponsored "loss mitigation," it appears we will begin to see a complete "rewrite" of the terms of the underlying mortgages (deed to secure debt in Georgia). The terms of the Bailout rewrite package are contained in Section 109. It states as follows:

SECTION 109 FORECLOSURE MITIGATION EFFORTS:

(a) Residential Mortgage Loan Serving Standards.

To the extent the Secretary acquires mortgages, mortgage-backed securities, and other assets secured by residential real estate, including multifamily housing, the Secretary shall maximize assistance for homeowners and use the Secretary's authority as investor to encourage the services of the underlying mortgages, consistent with a reasonable return to the taxpayer to take advantage of HOPE for homeowner program Section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

(b) Coordination.

The Secretary shall coordinate with the Corporation (that is, the FDIC), the Board(with respect to any mortgages held by a federal reserve bank as provided in Section 110(a)(1)(c)), the Federal Housing Finance Agency, the Secretary of HUD and other federal government entities that hold troubled assets to attempt to identify opportunities for the acquisition of classes of troubled assets that will improve the Secretary's ability to improve the loan modification and restructuring process and, where permissible, to permit bona fide tenants who are current on their rent to remain in their homes under the terms of the lease. In the case of a mortgage on residential rental property, the plan shall include protecting Federal, State and local subsidies (and generate enough funds to ensure the maintenance of the property).

(c) Consent to Reasonable Loan Modification Requests.

Upon any request arising under exiting investment contracts, the Secretary shall consent, where appropriate, and considering net present value to the taxpayer, to reasonable request for loss mitigation measures, including terms extensions, rate reductions, principal write downs, increases in the portion of loans within a trust or other structure allowed to be modified, or removal of other limitations on modifications. Discussion Draft, 110th Congress, 2nd Session, September 28, 2008.

& & &

As presented today, the remaining major provisions of the 700B Bailout Plan appear to be:
*
* An oversight board will be created, which will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director and the Housing and Urban Development secretary.
* The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury's use.
* Curbs will be placed on executive compensation plans for executives at companies that sell mortgage assets to Treasury. These include a $500,000 limitations on the tax deductibility of executive salaries for companies that participate in the plan.
* The Treasury is allowed in certain situations to exercise an option to take ownership stakes in participating companies.
* Treasury may establish an insurance program to guarantee certain assets for companies purchased prior to March 14, 2008. These assets include certain mortgage-backed securities.
* Another provision requires the president to propose legislation to recoup losses from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.


Hugh Wood, Atlanta, Georgia

Side-by-Side Comparison of Senate and House Bailout Bills

We have finally received marked up copies of the Senate Proposed Legislation, primarily authored by Senator Chris Dodd of Connecticut. The House Proposed Legislation is authored by Rep. Barney Frank, Massachusetts. Both bills provide for the purchase and sale of 700B of troubled assets with treasury funds. The Dodd bill (Senate) is substantially longer and more complete.

The Legislation, when enacted, will bring us a soup of new household acronyms. For example: The OFS: The Office of Financial Stability under the US Treasury. It will be the agency in the Treasury to process these 700B of troubled (garbage) assets. [As Jonathan Weil so cogently points out, why would anyone pay retail when purchasing from OFS?] The FSOB: A new 5 member board to oversee the FSO. The TARP: The Troubled Asset Relief Program. These are only a few of my favorite acronyms: There are many more to come.

It an effort not to reinvent the wheel, reproduced below is a side by side comparison chart of this very fast moving legislation. It was prepared by: Foley & Lardner LLP's Financial Crisis Response Team, Washington, DC.

Hugh Wood, Atlanta, Georgia

& & &

AUTHORITY TO PURCHASE TROUBLED ASSETS: SENATE VS. HOUSE
Proposed September 25, 2008; 110th Congress: 2nd Session.

Senate:

* Authority: Secretary authorized to establish program to purchase and make fund commitments to purchase assets from financial institutions - on terms developed by Secretary.
* Establishment of Treasury Office: Est. "Office of Financial Stability" w/in Office of Dom. Fin. headed by Asst. Secretary of Treas.
* Necessary Actions - Secretary may:
o Hire.
o Enter into contracts.
o Designate entities as "financial agents" of Federal Government.
o Establish vehicles to purchase troubled assets and issue obligations.
o Issue appropriate regulations.
* Limitation of Secretary's authority: Secretary may not purchase or commit to purchase without contingent shares equal in value to purchase price of assets.
o Contingent shares may include parents', subs', and affiliates' shares.
o If not publicly traded, sr. contingent debt instrument in lieu of shares.
o If multiple classes of shares, Secretary receives those with highest trading price.
Instruments shall include anti-dilution provisions.

House:

* Authority: Same except "financial institution" excludes any central bank of or institution owned by a foreign government. Secretary shall consult with Board of Governors of Federal Reserve, Federal Reserve Bank of NY; FDIC; Secretary of HUD.
* Establishment of Treasury Office: House bill silent on this point.
* Necessary Actions: Same as Senate.
Limitations of Secretary's authority: House bill silent on this point.


CONSIDERATIONS

Senate:

Senate bill silent on this point.

House:

When acting pursuant to Act, Secretary shall take into account providing stability to the financial markets, protecting taxpayers, whether strength of financial institution indicates transaction is the best use of funds under this Act.

OVERSIGHT

Senate:

* Establishment of Emergency Oversight Board: Responsible for reviewing exercise of authority under the Act, making recommendations to the Secretary. Membership is Chairman of the Fed, Chairman of Board of Directors of FDIC, Chair of SEC, non-governmental experts appointed by the Majority & Minority. Meet monthly. Board may establish a Credit Review Committee.
* Monthly reports by Secretary to Senate and House committees with detailed financial statement including agreements, transactions, assets purchased, costs and liabilities, operating expenses, and valuation method of transactions.
Weekly public reports of assets held and total purchased and sold that week

House:

* House bill silent on this point.
* Quarterly reports to Congress about authority exercised under Act.
Public reports within 48 hours: Secretary shall make available to the public in electronic form within 48 hours amounts and pricing of assets acquired, traded, or disposed of.

RIGHTS; MANAGEMENT; SALE OF TROUBLED ASSETS

Senate:

* Secretary has authority to manage troubled assets.
* FDIC manages all residential mortgages and mortgage-backed securities purchased by Secretary. (cont'd)
o FDIC shall use systematic approach for preventing foreclosures.
o FDIC shall report to Congress monthly on numbers and types of loan modifications (which increases affordability of loans) and foreclosures.
o FDIC may enter into financial transactions for its portfolio.
Not less than 20% of profits deposited into Housing Trust Fund & Capital Magnet Fund of Federal Housing Enterprises Regulatory Reform Act.; remainder to Treasury for reduction of public debt.

House:

* Secretary has same authority.
* House bill silent on FDIC's role with respect to residential mortgages and mortgage-backed securities.
Revenues and proceeds into general fund of Treasury.

MAXIMUM AMOUNT OF AUTHORIZED PURCHASES

Both Senate and House authorize up to 700B

FUNDING:

Both the Senate and the House:

* Funded from proceeds from disposal of assets.
Funds deemed appropriated at the time they are spent.

LIMITS ON REVIEW

Senate:

* Troubled asset purchases will not be set aside unless arbitrary and capricious.
Residential mortgage loans subject to all ordinary claims and defenses.

House:

* No injunctive or equitable relief from Secretary's actions under the Act.
Homeowner's rights not curtailed by any Secretary action.

ASSISTANT TO HOMEOWNERS AND LOCALITIES/FORECLOSURE MITIGATION EFFORTS

Senate:

* Freddie Mac, Fannie Mae, FDIC, and Federal Reserve develop programs within 60 days to prevent foreclosures and promote homeownership through loan modifications and use of HOPE for Homeowners Program. Report to Congress within 60 days and monthly thereafter.
* Agencies sell properties they own through foreclosure to States & Localities to stabilize communities; agencies encourage owners of properties in which agencies hold an interest to do the same.
Amendments to Chapter 11.

House:

* Silent on development of foreclosure prevention programs.
* Secretary must encourage owners of properties in which government holds an interest to modify loans (interest rates, principal)
Amendments to Chapter 11.

EXECUTIVE COMPENSATION

Senate:

To be eligible to sell assets through this Act, entities must accede to limits on incentives to take risks that the Secretary deems inappropriate or excessive, other limitations deemed appropriate.

House:

* Same.
Additional criteria where Secretary makes direct purchases of assets and effective for duration of equity position: some shareholders rights provisions, such as non-binding votes on executive compensation.

INSURANCE PARITY

Senate:

Secretary may establish insurance or guaranty program for money market mutual funds for up to one year; the amount cannot exceed what is guaranteed by FDIC; money-market funds shall be charged premiums for insurance or guaranty.

House:

Same

TERMINATION OF AUTHORITY

Senate:

* Authority terminates Dec. 31, 2009.
May be extended to no later than 2 years after enactment. Secretary may hold assets and assert rights after termination.

House:

* Authority terminates two years after enactment.
Secretary may hold assets and assert rights after termination.

INCREASE IN STATUTORY LIMIT ON PUBLIC DEBT

Senate:

* $11,315 (up from $10,615.)

House:

* Same

ANNUAL FINANCIAL REPORTS AND AUDITS

Senate:

* Authority terminates Dec. 31, 2009.
* Comptroller General shall have authority to audit, to hire outside contractors, and to access any records. Secretary of Treasury pays for oversight.
* Office shall implement internal controls.

House:

* Comptroller General shall commence ongoing oversight of whether goals of Act have been met, characteristics of transactions and assets, efficiency and compliance, conflicts of interest.
* Comptroller General shall conduct annual audit.
* GAO shall have a permanent presence in office, have access to records and personnel.
* GAO shall report to House Financial Services Committee, Senate Banking Committee, and IG of Treasury once every 60 days.
* Office shall implement internal controls.

CONFLICTS OF INTEREST

Senate:

* Secretary shall issue regulations within 120 days concerning conflicts of interest relating to contactors, assets managers, purchase & management of troubled assets, post-employment restrictions.

House:

* Secretary shall solicit proposals from a broad range of qualified firms and individuals; shall manage conflicts of interest through disclosure and restricting info sharing where contractor serves federal government and other clients with whom conflicts exist.

SPECIAL IG FOR TROUBLED ASSET PROGRAM

Senate:

* Creation of Office of Special IG to conduct, supervise and coordinate audits and investigations of the purchase, management, and sale of assets by the Secretary.
* Quarterly reports should include information on categories of troubled assets purchased, reasons for purchase, list of financial institutions they were purchased from, bios on persons hired to manage assets.
*
House:

* House bill silent on this point.

COORDINATION WITH FOREIGN AUTHORITIES AND CENTRAL BANKS
SENATE

Senate:

* Senate bill silent on this point.

House:

* Secretary shall coordinate with foreign financial authorities to work toward establishment of similar programs to maximize impact of purchases under Act.

CONGRESSIONAL OVERSIGHT PANEL
SENATE

Senate:

* Senate bill silent on this point.

House:

* Establish Congressional Oversight Panel: responsibilities are to review and report to Congress on Secretary's use of authority under the Act, on the impact of purchases on markets and financial institutions, on the extent to which information made public contributed to market transparency, and on the effectiveness of foreclosure mitigation efforts.
* Membership: 4 year terms, appointed by House and Senate leadership. 7-person committee with a chairperson. Meet at the behest of the chair. Will have a staff director, a staff, and will hold hearings. Annual report to Congress.
* Congressional Oversight Panel terminated after disposition of last troubled asset.
* Funding half from House, half from Senate.


END

The Current Bailout is A Train Wreck

The Current Effort to bailout US and Foreign Banks with 700B of US Taxpayer Money seems to be stuck in political limbo. After Congressional leaders indicated Thursday, September 25, 2008, that they had reached a compromise, house Republicans announced angrily that they refused to extend a blank check to the Administration. Republicans stated that they refused to commit US financial markets to a new Socialist Central Managed Economy (does the old “5 year plan” come to mind, Comrade? CCCP?) and tie executive compensation to statutory Congressional mandates.

When you consider that 150B would provide complete and fully paid healthcare for the entire United States, illegals and all, these dollars thrown at past banking errors simply should not be tolerated.

Do something? Perhaps. But start on a scale 1/5 or ¼ as large. Oh! Dire Consequences! The last time we wrote a blank check it was “The Sky is Falling,” and they have “Weapons of Mass Destruction.” And before the conservatives attack me, I have a fairly unbroken “red” state voting record.

Maybe the world markets will collapse. If they collapse, they will come back as some point. When they do, they will still be “markets.” This claptrap 700B ensures that the United States will forever enter the Financial Twilight Zone of the Post 1945 UK-Labour Governments and Franco Managed Economies.

If we do do it, then we should demand that the taxpayers get pure equity for their investment as either as warrants or preferred stock. We should not write a blank check.

Hugh Wood, Atlanta, Georgia

& & &

Sweden’s Banking Collapse in 1992 is instructive. See, Stopping a Financial Crisis, the Swedish Way By CARTER DOUGHERTY Published: September 22, 2008 © New York Times.

A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 - after years of imprudent regulation, short-sighted economic policy and the end of its property boom - that its banking system was, for all practical purposes, insolvent. But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

"If I go into a bank," said Bo Lundgren, who was Sweden's finance minister at the time, "I'd rather get equity so that there is some upside for the taxpayer." Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today's dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.

A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.

The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.
Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. "The public will not support a plan if you leave the former shareholders with anything," he said.

The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.

Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden's banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.

Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden's currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt's conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation's 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden's largest bank. Mr. Wallenberg, the scion of the country's most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.
"For every krona we put into the bank, we wanted the same influence," Mr. Lundgren said. "That ensured that we did not have to go into certain banks at all."

By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.
The politics of Sweden's crisis management were similarly tough-minded, though much quieter.

Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.
"The only thing that held back an avalanche was the hope that the system was holding," said Leif Pagrotzky, a senior member of the opposition at the time. "In public we stuck together 100 percent, but we fought behind the scenes."

The NewRTC: Jupiter Size Me!

After President Bush’s address to the nation on Wednesday night September 24, 2008, I am more convinced that the coming NewRTC will be (if compared to a planet in out solar system) the size of Jupiter. This is no Pluto (planet?) this is no Mercury, this massive shadow casting new federal agency is Jupiter.

The numbers defy human understanding. Consider: England as we know it was founded by force in the year 1066 (The Battle of Hastings). 942 years have run off the clock to today. If British Kings spent 2 million dollars (its an analogy, ok) everyday from 1066 to the present, they would not have paid out the amount of money that Congress is prepared to appropriate for The NewRTC1. Think of it: Everyday, $2,000,000.00. Tick. Tick. Tick. They have not consumed 700B dollars by September 24, 2008.

It’s coming. Bush is behind it. The US Treasury and Federal Reserve are behind it. Both the House and Senate are close to a proposed bill. Candidate McCain is behind it. Candidate Obama says we must act on something, now.

Less than a month ago, U.S. Rep. Barney Frank was ridiculed for proposing the very thing the Bush Administration says is mandatory.

U.S. Rep. Barney Frank, D-Massachusetts, who will hold hearings on the subject this week, The Washington Post reported Tuesday, was laughed at sixth months ago when he talked-up redeploying the RTC, or a new, modified agency to buy the bad assets and/or the mortgages / bonds associated with them. Few lawmakers are laughing now. The RTC can buy distressed debt at fair market value and help keep hundreds of thousands of citizens in their homes, and in the process preserve businesses, and perhaps, whole local economies. FoxNews

I thought the 1989 RTC was the model from which all bailouts should be measured. Looking backward further into history, it appears that this bailout might be likened to the granddaddy of all bailouts, the Reconstruction Finance Corporation or 1932. It was created in the last gasp of the Hoover Administration and turned over to FDR.

Reconstruction Finance Corporation (RFC), former U.S. government agency, created in 1932 by the administration of Herbert Hoover. Its purpose was to facilitate economic activity by lending money in the depression. At first it lent money only to financial, industrial, and agricultural institutions, but the scope of its operations was greatly widened by the New Deal administrations of Franklin Delano Roosevelt. It financed the construction and operation of war plants, made loans to foreign governments, provided protection against war and disaster damages, and engaged in numerous other activities. [It disbursed $1.5 billion in 1932, $1.8 billion in 1933, and $1.8 billion in 1934. Wiki] In 1939 the RFC merged with other agencies to form the Federal Loan Agency, and Jesse Jones, who had long headed the RFC, was appointed federal loan administrator. After Jones became (1940) Secretary of Commerce, Congress transferred (1942) the RFC to his department. The Columbia Electronic Encyclopedia, 6th ed. Copyright (c) 2007, Columbia University Press.

As a Real Estate Litigator this NewRTC looks to me like a whole new economic continent to be explored and savored. The legal vista is wide as the eye can see.

As a taxpayer, I am more circumspect. I cannot bring myself to approve giving the US Treasury a blank check for 700B dollars – imminent peril or not. Maybe I am a running contrary to my personal economic interests as a lawyer who stands to gain from this gargantuan new bureau; however, this hysteria strike me as part “The Sky is Falling,” Chicken Licken and, someone else’s ox will be gored in the Financial World if Congress does not act "now!". The last time we spent 500B dollars in a few days, the world was ending based on one country’s possession of weapons of mass destruction (and I am a member of their political party). The world did not end, but out 500B ended.

Again, it’s too much money going out with too little oversight – too fast. Give them 10B to 50B in increments to keep the sky from falling, but don’t give them 700B in one week. By writing this, at least I can tell my grandchildren that I urged restraint.

At this breakneck speed, we may have a new improved, fully funded, NewRTC by this weekend. Gee, don’t we just love the smell of new money on those newly minted carpets.

Hugh Wood, Atlanta, GA

1 $700,000,000,000.00/343,830 days = $2,035,889.00.

We Should Pause :: Its Too Much Money

It may be that Rome is burning while Nero fiddles¹, however, we should pause on this bailout. The dollars are simply too staggering. In the last 40 years, the US has only posted 347.5B in "bailout" money. Of that, 293.8B were for the Savings & Loan debacle of 1989. In the absence of the S&L disaster, we would only have posted 53.7B in bailout funds.

This proposed bailout can only be related in relative size to the Great Depression or WWII. http://www.propublica.org/special/government-bailouts In the last two weeks, the US Treasury has proposed (committed actually) that we throw 1,015B of US funds to bailout (?) Wall Street. Really? [Well, the world financial markets or something.]

Without the S&L debacle, the US Treasury has committed 18 times the amount of bailout money in the last two weeks the entire US committed in the last 40 years. If you add in the 300B S&L disaster, it still is staggering. In the last two weeks, the US Treasury has committed 3 times all the funds the US has committed in the last 40 years. These are staggering sums. And, regardless of the world financial reaction, they are so large, we should pause.

Hugh Wood, Atlanta, GA

& & &

Listed below is the Treasury's initial proposal. It started as 3 pages and is now 40 pages. However, perhaps we should take weeks, not merely days, to enact this bailout program.


The following is the legislative proposal from Treasury Department for authority to buy mortgage-related assets:
Section 1. Short Title.
This Act may be cited as ____________________.
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.-The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.-The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
Sec. 3. Considerations.
In exercising the authorities granted in this Act, the Secretary shall take into consideration means for-
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.
Sec. 4. Reports to Congress.
Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.
Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.
(a) Exercise of Rights.-The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.
(b) Management of Mortgage-Related Assets.-The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.
(c) Sale of Mortgage-Related Assets.-The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.
(d) Application of Sunset to Mortgage-Related Assets.-The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.
Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.
Sec. 7. Funding.
For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Sec. 9. Termination of Authority.
The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.
Sec. 10. Increase in Statutory Limit on the Public Debt.
Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.
Sec. 11. Credit Reform.
The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.
Sec. 12. Definitions.
For purposes of this section, the following definitions shall apply:
(1) Mortgage-Related Assets.-The term "mortgage-related assets" means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.
(2) Secretary.-The term "Secretary" means the Secretary of the Treasury.
(3) United States.-The term "United States" means the States, territories, and possessions of the United States and the District of Columbia.

END

¹ The Great Fire of Rome erupted on the night of July 18 to July 19, 64. The fire started at the southeastern end of the Circus Maximus in shops selling flammable goods. The extent of the fire is uncertain. According to Tacitus, who was nine at the time of the fire, it spread quickly and burned for five days.

US Treasury Asks for 1.8 Trillion Dollars of Borrowing Authority

US Treasury Asks for 1.8 Trillion Dollars of Borrowing Authority.

As of today, we do not have a marked up copy of any legislation that has been proposed to Congress. However, we do have CNBC’s reporting of the Treasury’s proposed plan. And, it is staggering. Really, it is staggering.

The Iraq War has cost the US 500B in direct expenditures and a proposed 615B in interest payments on the 500B spent.

While I am not stating that some action should not be taken with regard to the meltdown in the mortgage industry, the commitment of 700B in the opening statement of the US Treasury proposal is just staggering.

Unless my math is off, it appears that the Treasury is seeking commitments of 1.8T (that is Trillion with a ‘T’) dollars. Not all of these funds are direct expenditures, but are potential borrowing limits to accomplish the goals sought by Treasury.

The details of the US Treasury Position are:

“Following are details of actions, proposals and amounts:
-Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.
-Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.
-The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.
-At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.
-Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac. The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie's at $798.2 billion.
-$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.
-At least $87 billion in repayments to JPMorgan Chase [JPM 42.48 -4.57 (-9.71%)] for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers [LEH 0.19 -0.0251 (-11.67%)]. Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.
-$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.
-$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.
-$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.
-$29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.
-At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits." CNBC 09222008

Democrats under Sen. Chris Dodd have proposed serious debt and capitalization restrictions on the US Treasury proposal. They have yet to be incorporated in the US Treasury response.

Hugh Wood, Atlanta, GA

The Coming NEW RTC for Real Estate

THE COMING NEW RTC

For those of us not privy to the behind the scenes work at the White House, Treasury Department and the SEC, we can only guess at the possible final view of the Wall Street Mortgage Bailout.

While Washington, DC may call it a "Wall Street Bailout," mainstreet is going to see it as a SubPrime Mortgage Bailout and a Bailout for the Leviathan Banks holding the nonperforming debt.

What is going to come out of this mess for the Real Estate Industry in the USA? My prediction is that it is going to be the 2008 version of the Resolution Trust Corporation. It will be a Resolution Trust Corporation for Mortgage failures on Steroids. For lack of a better word, the NEW RTC.

You would think that as a society we would learn. Look at the simplistic statement of what got us into the last crisis in 1990 was about. "The savings and loan crisis of the 1980s and 1990s (commonly referred to as the S&L crisis) was the failure of 747 savings and loan associations (S&Ls) & & &. The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government-that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts[1]-which contributed to the large budget deficits of the early 1990s." Wiki.

The S&L meltdown was a direct result of the deregulation of S&L's and allowing them to proceed into areas other than secured home mortgage. They did proceed, deregulation and brought us 160B of nonperforming assets. Thanks. This time around Banks and Investment banks, deregulated, took us into the world of 700B of non-performing assets. Thanks, again.

If we draw a simply analogy from 1990 to 1992, we are headed for a New RTC Bailout that is 5 times as large as the 1990 to 1992 bailout with a coming economic hangover of a magnitude yet unknown.

& & &

There are presently very few fleshed out statements of what Congress will pass to bailout the failed mortgage banking industry. However, the New York Times ran the following clip about the parameters of the coming NEW RTC:


New York Times
September 21, 2008
The Wall Street Bailout Plan, Explained
By DAVID STOUT
WASHINGTON - News reports about the upheaval in the world of finance have been full of esoteric terms like "mortgage-backed securities" and "credit-default swaps," but the crisis has resonated for people who know little about Wall Street and who did not think they would ever have to know. Here are several questions and answers of concern to Main Street Americans:
Q. The bailout program being negotiated by the Bush administration and Congressional leaders calls for the government to spend up to $700 billion to buy distressed mortgages. How did the politicians come up with that number, and could it go higher?
A. The recovery package cannot go higher than $700 billion without additional legislation. As for that figure, it lies between the optimistic estimate of $500 billion and the pessimistic guess of $1 trillion about the cost of fixing the financial mess. & & &
Q. Who, really, is going to come up with the $700 billion?
A. American taxpayers will come up with the money, although if you are bullish on America in the long run, there is reason to hope that the tab will be less than $700 billion. After the Treasury buys up those troubled mortgages, it will try to resell them to investors.

& & &

Note that Stout says: "After the Treasury buys up those troubled mortgages, it will try to resell them to investors."

How can that be except by the machinery we observed in the Old RTC.

The NEW RTC is poised to "launder" and resell between 500B and 700B of real dirt underlying the failed mortgage backed securities.

The 2008 California Budget is 141B. This bailout is somewhere between 4 and 7 times as large as the entire California State Budget and California is the 5th largest economic unit in the world. These dollars are staggering.

The real estate mortgage industry is headed for the largest sea change since WWII. The possibilities for work for lawyers and real estate professions is in the NEW RTC - well - endless.

Hugh Wood, Atlanta, Georgia.