The Binary Circumstance

As expected, President Bush signed the “housing” bill which is really a huge bailout for banks, Fannie Mae and Freddie Mac.

WASHINGTON (AP) — President Bush on Wednesday signed a massive housing bill intended to provide mortgage relief for 400,000 struggling homeowners and stabilize financial markets.

Bush signed the bill without any fanfare or signing ceremony, affixing his signature to the measure he once threatened to veto, in the Oval Office in the early morning hours. He was surrounded by top administration officials, including Treasury Secretary Henry Paulson and Housing Secretary Steve Preston.

Guess he didn’t want any TV news coverage of that event.

Democrats used the law to take advantage of a chance to increase the ceiling on the national debt.

Democratic leaders, recognizing that the measure could be one of the last items to become law during what’s left of their abbreviated election-year schedule, tacked on an $800 billion increase, to $10.6 trillion, in the statutory limit on the national debt.

Conservative Republicans were vehemently opposed to the bill, particularly the help for Fannie Mae and Freddie Mac. Critics charge the companies enjoy lavish profits in good times and wield their outsized political clout to resist regulation while depending on the government to bail them out should they falter.

From the Wall Street Journal:

President Bush is poised to sign the housing and Fannie Mae bailout bill, after the Senate passed it with 72 votes on the weekend. But an underreported part of this story is that Majority Leader Harry Reid refused to allow a vote on Republican Jim DeMint’s amendment to bar political donations and lobbying by Fannie and its sibling, Freddie Mac.

This is a rare parliamentary move for a body in which even Senators in the minority party have long been able to force votes. The strong-arm play illustrates how politically powerful these government-sponsored enterprises remain even after going hat in hand to taxpayers. This has implications in the days ahead, because the Beltway battle now shifts to who will be the new regulator for the mortgage giants and how much political insulation he’ll have from Fannie and Freddie pressure.

We believe in the right of individuals and businesses to lobby Congress. But with Fan and Fred now explicitly guaranteed by taxpayers, letting them ladle cash all over Washington amounts to using government-guaranteed profits to lobby for continued government protection. Congress sets the rules in favor of Fan and Fred, which then repay the Members with cash from their rigged profit stream. This is the government lobbying itself for more government.

I’m still trying to find out how McCain and Obama voted on this. I’d be surprised if both did not vote in favor of it.

The article notes the political contributions already made by these GSEs to people like House Speaker Nancy Pelosi and other Democrats and Republicans. They also give away millions in “charitable” contributions.

Most of this foundation money goes to charity groups uninvolved in politics and policy. But tens of millions of dollars find their way to policy advocacy groups on the left and even some on the right. (See nearby table.) Affiliates of Acorn, the left-wing activist group, have received multiple $100,000 grants for their “housing” activities.

Jesse Jackson’s Citizenship Education Fund, an offshoot of his Rainbow/PUSH Coalition, has received more than $500,000 from Fannie and Freddie since 1996. A decade ago Mr. Jackson accused Fannie and Freddie of discriminatory lending practices. Those charges of racism went away once the grant money started flowing. Groups on the left complain about “corporate welfare” all the time, but curiously nary a one has opposed the Fannie and Freddie bailout — which amounts to one of the biggest corporate welfare gifts in U.S. history.

President Bush is expected to sign the bailout quickly.

Check out The CRA Scam and Its Defenders at the Ludwig Von Mises Institute for a discussion of how the Community Reinvestment Act passed during the Carter administration contributed to the current problems in the housing market.

“Liberal” economists are overjoyed by the bursting of the housing bubble, for it provides them with what they believe is another “market failure” story…

When the government controls the market, the whole idea of a “market failure” is absurd. Responsibility always belongs to those in control.

When the CRA was created during the Carter administration, the administration also funded with tax dollars numerous “community groups” that have helped the Fed, the Comptroller of the Currency, and other federal regulatory agencies to enforce the act. Under the CRA, if a bank wants to make virtually any change in its business operations — merging, opening up a new branch, getting into a new line of business — it must first prove to regulators that it has made “enough” loans to the government’s preferred borrowers. The (partially) tax-funded “community groups” like ACORN (Association of Community Organizations for Reform Now) can file petitions with regulators that stop the bank’s activities in their tracks, perhaps defeating them altogether. The banks routinely buy off ACORN and other “community groups” by giving them millions of dollars as well as promising to make even more dubious loans.

In order to try to diversify the risk of these loans, the Federal Home Loan Mortgage Company (”Freddie Mac”) pioneered the “securitization” of bundles of these high-risk loans so that they could be sold on secondary markets. Such “securitization” exploded during the 1990s as a result of government regulation…

With the Fannie Mae and Freddie Mac bailout legislation, the government will not only continue this cycle, they are forcing the taxpayers to give an unlimited line of credit to private companies that may not be able to pay it back. Not to worry, though. If they can’t pay it back, the taxpayers just get stuck with the debt.

Not satisfied with the mess they’ve already made of the housing and financial markets, the Feds are laying the foundation to nationalize Fannie Mae and Freddie Mac with their “housing-bailout” bill which President Bush has said he will sign. The legislation is also another huge gift to big banks that shifts even more risk to taxpayers. Shifting risks and costs to taxpayers and ordinary citizens while guaranteeing profits to big corporations has become the hallmark of the current administration.

Bloomberg.com provides some sketchy details of the plan.

Bank of America Corp., JPMorgan Chase and Co., Treasury Secretary Henry Paulson and Pacific Investment Management Co.’s Bill Gross are winners in the housing-bailout bill Congress passed last week.

Losers in the bill include shareholders of Fannie Mae and Freddie Mac, who may see their equity wiped out if the U.S. Treasury uses its new authority to take over the government- sponsored companies. Fannie and Freddie shares have fallen more than 70 percent in New York Stock Exchange composite trading this year.

[...]

The bill did not go far enough to overhaul the lenders and would leave taxpayers on the hook for “billions and billions of dollars,” House Republican Leader John Boehner, 58, said.

“I am disappointed that we couldn’t do better,” Boehner, an Ohio Republican, said on the House floor last week.

Once Bush signs the bill into law, the Treasury will have the right to buy unlimited stock in Fannie Mae and Freddie Mac, which are known as government-sponsored enterprises. The measures provide a federal backstop for the two companies, letting them borrow at a cheaper rate than private corporations.

Unlike past corporate rescues, Congress is not requiring the companies to pay anything up front for the backing, said Joshua Rosner, an analyst with independent research firm Graham Fisher & Co. in New York.

“Once again, Fannie and Freddie rolled Congress,” Rosner, 41, said. “This is maybe the most taxpayer-unfriendly legislation we’ve seen in the past decade.”

[...]

The legislation offers little for shareholders, since debt owners will take precedence in the event the Treasury needs to begin buying the shares, said Moshe Orenbuch, an analyst at Credit Suisse, who rates both companies “underperform.”

“I don’t think the plan is positive for shareholders,” he said. “For senior-debt holders, certainly. I think that if the taxpayer does have to provide support to the GSEs, it’s going to be extremely costly to the shareholders.”

The centerpiece of the legislation is a three-year FHA program that lets banks shift mortgages unlikely to be repaid to the government, after they agree to cut the amount of principal. The Congressional Budget Office estimated in May the program will cost $1.7 billion and cover about 500,000 loans over five years.

[...]

JPMorgan Chase, which services about $775 billion in mortgages, probably will tap the program since it will let investors shed deteriorating loans, spokesman Tom Kelly said.

The bank’s mortgage-lending business will benefit from the $7,500 tax credit for first-time homebuyers included in the bill by enticing more people to buy homes, Kelly said.

“This bill with the FHA guarantee around it is going to encourage banks to use the program more,” Francis Creighton, vice president of legislative affairs at the Mortgage Bankers Association, a Washington-based industry group, said in a telephone interview.

The measure also raises Fannie Mae and Freddie Mac’s loan limit to $625,500 from $417,000 in high-cost areas.

Over the past decades the government has done much to artificially inflate the cost of housing and during the past few years they accelerated their efforts in the aftermath of 9/11 and the dot-com bubble implosion.

As the housing bubble has deflated taking the financial markets with it, the Feds have had to step in and provide even more taxpayer financed support to keep the house of cards from completely collapsing while the politicians who are the root of the problem assure us that the system is sound. If it was sound, they would not have to keep bailing it out with bailout packages that get more generous with each passing month.

With the taxpayers providing more and more guarantees, there is little or no incentive for these companies to exercise any caution or sound financial practices when making loans because they have less and less to lose by making poor choices.

When are they going to fix the underlying problem: that the government can borrow, spend and print as much money as they want, give it to whomever they want and force the taxpayers to pay for it at the point of a gun?