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Saturday, September 27, 2008

Q & A: The Financial Crisis and You . NOW on PBS

How will the current financial crisis affect average working Americans, and what should they do during these uncertain times? Pace University finance professor Ann Lee, a former bond trader who opposes the bailout proposal, addresses personal concerns about the country's economic mess.

How will the current financial crisis affect my savings and investments?

The answer depends on several factors that include which financial instruments one is invested in, how much, and where. According to the current FDIC program, every individual will be guaranteed up to $100,000 per bank. So if you have more than that amount, spreading your savings among several banks by buying CDs or opening multiple bank accounts will ensure the safety of your savings. Regarding investments, the answer will depend on the type of investment you own because every type of investment will perform differently. Stocks, commodities, bonds, etc. will all fluctuate differently in price and magnitude of price changes. The direction of prices for many of these investments will depend on multiple factors such as fundamental changes in government policy and changes in supply and demand for such investments.

What should I be doing with my money right now?

Since things are so uncertain with government interventions, I think it would be wise to be conservative and not try to jump into any risky securities even if they seem "cheap" according to some "gurus" on television. Even hedge fund professionals have been closing shop because they cannot make money in this financial market.

How about retirement funds, like my 401(k)?

The safety of your retirement funds is dependent on the competence of your pension managers. Some pension managers have made unwise investments and have suffered severe losses so it is very possible that your retirement funds are no longer sufficient to support your retirement any time in the near future.

People should be concerned because most pension managers do not have the flexibility of the best hedge fund managers to preserve capital. Nor do these managers get presented with the best opportunities to invest so the chances that your pension manager is going to provide you with the nest egg you envisioned is not a safe bet. People retiring right away will most likely have to reduce their standard of living substantially if they have not already saved something in their personal accounts separate from social security and their pension. People with more time before they retire should start saving aggressively now and not expect to receive social security twenty years down the road.

A number of reputable firms have gone under in recent weeks. Should I be concerned about the health of any other companies?

Yes, because many financial companies still have not offered any transparency on their accounting of illiquid securities that have been artificially inflated. They still have not come clean with their losses. Treasury Secretary Paulson is proposing to use a minimum of $700 billion in taxpayers' money to buy these inflated, illiquid securities as a last ditch attempt to save these companies. However, I have grave concerns that his plan will not work.

How will the proposed $700 billion rescue package affect me?

This rescue package will add at least an additional $3,000 in taxes to every American man, woman, and child. The rescue package will not give you mortgage relief, credit card relief, or any other relief. It is designed to give Wall Street firms relief so that they do not go bankrupt. The government will be buying securities that have almost no value in exchange for $700 billion or more. These securities have virtually no value because they are about ten degrees removed from the actual assets.

Can I expect my taxes to go up?

Yes, because the government debt burden will explode in size if Paulson's plan passes.

What if I need a college loan, mortgage or any other loan: Is that going to be more difficult?

It will be hard to get loans regardless of whether the bailout happens or not. The bailout will not make it easier to get loans because Wall Street banks are not going to loosen lending standards just because they can sell their existing bad paper to the government. If the banks free up their balance sheet to make new loans, they will remain highly stringent and conservative because they can no longer sell these loans to investors anymore now that investors no longer trust the banks. These banks now have to keep the loans on their books so as a result, they don't want to experience any defaults with anyone that doesn't have the highest credit scores.

If you have a decent credit history, there are still multiple places to obtain a loan. Many small regional banks and credit unions are not burdened by these illiquid securities so they can still make new loans. Additionally, many entrepreneurial websites have also sprung up that have loaned billions of dollars, even if your credit history isn't perfect.

Will we enter into a recession?

The economy will slow regardless of whether Paulson's plan passes or not. The United States has relied on a consumption-based economy in which it just consumes and doesn't produce an equal amount. The consumption growth has relied on credit growth through such products as credit cards, auto loans, student loans, mortgage loans, etc. Investors such as foreign central banks, hedge funds, pension funds bought these loans and securities that are correlated to these loans from banks and investment banks. However, when consumers started defaulting on these loans, the investors no longer wanted to buy these securities since they were losing enormous sums of money. Since banks could no longer sell bad loans to investors, the banks were stuck with them and thus have been unwilling to make new loans. The country will enter recession or even depression unless Americans can come up with a new engine of economic growth that will produce something of tangible value such as technology to clean up pollution or cures for cancer that the world will buy and thus create new jobs for Americans. Having the government support the existing consumption model through the $700 billion bailout to Wall Street will not jump start growth because Americans are running out of ways to pay for their debt.
Q & A: The Financial Crisis and You . NOW on PBS

First Presidential Debate. Analysis

The first of three scheduled debates between Republican Sen. John McCain and Democratic Sen. Barack Obama took place Sept. 26 on the campus of the University of Mississippi at Oxford. It was sponsored by the Commission on Presidential Debates. It was carried live on national television networks and was moderated by Jim Lehrer, executive editor and anchor of the PBS "NewsHour" program.

We noted these factual misstatements:

Did Kissinger Back Obama?

McCain attacked Obama for his declaration that he would meet with leaders of Iran and other hostile nations "without preconditions." To do so with Iran, McCain said, "isn't just naive; it's dangerous." Obama countered by saying former Secretary of State Henry Kissinger – a McCain adviser – agreed with him:

Obama: Senator McCain mentioned Henry Kissinger, who's one of his advisers, who, along with five recent secretaries of state, just said that we should meet with Iran – guess what – without precondition. This is one of your own advisers.
McCain rejected Obama's claim:
McCain: By the way, my friend, Dr. Kissinger, who's been my friend for 35 years, would be interested to hear this conversation and Senator Obama's depiction of his -- of his positions on the issue. I've known him for 35 years.
Obama: We will take a look.
McCain: And I guarantee you he would not -- he would not say that presidential top level.
Obama: Nobody's talking about that.
So who's right? Kissinger did in fact say a few days earlier at a forum of former secretaries of state that he favors very high-level talks with Iran – without conditions:
Kissinger Sept. 20: Well, I am in favor of negotiating with Iran. And one utility of negotiation is to put before Iran our vision of a Middle East, of a stable Middle East, and our notion on nuclear proliferation at a high enough level so that they have to study it. And, therefore, I actually have preferred doing it at the secretary of state level so that we -- we know we're dealing with authentic...

CNN's Frank Sesno: Put at a very high level right out of the box?

Kissinger: Initially, yes.But I do not believe that we can make conditions for the opening of negotiations.

Later, McCain's running mate, Sarah Palin, was asked about this by CBS News anchor Katie Couric, and Palin said, "I’ve never heard Henry Kissinger say, ‘Yeah, I’ll meet with these leaders without preconditions being met.'" Afterward Couric said, "We confirmed Henry Kissinger’s position following our interview."

After the McCain-Obama debate, however, Kissinger issued a statement saying he doesn't favor a presidential meeting:
Kissinger: Senator McCain is right. I would not recommend the next President of the United States engage in talks with Iran at the Presidential level. My views on this issue are entirely compatible with the views of my friend Senator John McCain.
$42,000 per year?

McCain said – and Obama denied – that Obama had voted to increase taxes on "people who make as low as $42,000 a year." McCain was correct – with qualification.

McCain: But, again, Senator Obama has shifted on a number of occasions. He has voted in the United States Senate to increase taxes on people who make as low as $42,000 a year.
Obama: That's not true, John. That's not true.
McCain: And that's just a fact. Again, you can look it up.
Obama: Look, it's just not true.
debate.bothYes, as we’ve said before, Obama did in fact vote for a budget resolution that called for higher federal income tax rates on a single, non-homeowner who earned as little as $42,000 per year. A couple filing jointly, however, would have had to earn at least $83,000 per year to be affected. A family of four with income up to $90,000 would not have been affected.

The resolution actually would not have altered taxes without additional legislation. It  called generally for allowing most of the 2001 and 2003 Bush tax cuts to expire. McCain is referring to the provision that would have allowed the 25 percent tax bracket to return to 28 percent. The tax plan Obama now proposes, however, would not raise the rate on that tax bracket.

Timetable Tiff

Obama contradicted McCain about what Joint Chiefs of Staff Chairman Admiral Mike Mullen's said regarding "Obama's plan" for troop withdrawals.
McCain: Admiral Mullen suggests that Senator Obama's plan is dangerous for America.
Obama: That's not the case.
McCain: That's what ...
Obama: What he said was a precipitous...
McCain: That's what Admiral Mullen said.
Obama: ... withdrawal would be dangerous. He did not say that. That's not true.
Admiral Mullen did say in a Fox News interview that having a time line for withdrawal would be dangerous.
Mullen (July 20): I think the consequences could be very dangerous in that regard. I'm convinced at this point in time that coming – making reductions based on conditions on the ground are very important.
However, interviewer Chris Wallace had just told Mullen to take Obama out of the equation.
Wallace (July 20): But I'm asking you in the absence – forget about Obama. Forget about the politics. If I were to say to you, "Let's set a time line of getting all of our combat troops out within two years," what do you think would be the consequences of setting that kind of a time line?
So strictly speaking Mullen was not talking specifically about "Obama's plan." He did say a rigid timetable could have dangerous consequences.

Earmarks Down, Not Up

McCain was way off the mark when he said that earmarks in federal appropriations bills had tripled in the last five years.
McCain: But the point is that – you see, I hear this all the time. "It's only $18
billion." Do you know that it's tripled in the last five years?
In fact, earmarks have actually gone down. According to Citizens Against Government Waste, there was $22.5 billion worth of earmark spending in 2003. By 2008, that figure had come down to $17.2 billion. That's a decrease of 24 percent.

Taxpayers for Common Sense, another watchdog group, said in 2008 that "Congress has cut earmarks by 23 percent from the record 2005 levels," according to its analysis.

$3 million to study the DNA of bears?

And while we're on the subject of earmarks, McCain repeated a misleading line we've heard before.
McCain: You know, we spent $3 million to study the DNA of bears in Montana. I don't know if that was a criminal issue or a paternal issue, but the fact is that it was $3 million of our taxpayers' money. And it has got to be brought under control.
McCain's been playing this for laughs since 2003. The study  in question was done by the U.S. Geological Survey, and it relied in part on federal appropriations. Readers (and politicians) may disagree on whether a noninvasive study of grizzly bear population and habitat is a waste of money. McCain clearly thinks it is – but on the other hand, he never moved to get rid of the earmark. In fact, he voted for the bill that made appropriations for the study. He did propose some changes to the bill, but none that nixed the bear funding.

Iraqi Surplus Exaggerated

Obama was out of date in saying the Iraqi government has "79 billion dollars," when he argued that the U.S. should stop spending money on the war in Iraq.
Obama: We are currently spending $10 billion a month in Iraq when they have a $79 billion surplus.obama
As we've said before, there was a time when the country could have had as much as $79 billion, but that time has passed. What the Iraqis actually “have” is $29.4 billion in the bank. The Government Accountability Office projected in August that Iraq’s 2008 budget surplus could range anywhere from $38.2 billion to $50.3 billion, depending on oil revenue, price and volume. Then, in early August, the Iraqi legislature passed a $21 billion supplemental spending bill, which was omitted from the GAO’s surplus tally since it was still under consideration. The supplemental will be completely funded by this year’s surplus. So the range of what the Iraqi’s could have at year’s end is actually $47 billion to $59 billion. The $79 billion figure is outdated and incorrect.

$700 billion for oil?

McCain repeated an exaggerated claim that the U.S. is sending $700 billion per year to hostile countries.
McCain: Look, we are sending $700 billion a year overseas to countries that don't like us very much. Some of that money ends up in the hands of terrorist organizations.
mccainThat's not accurate. McCain also made this claim in his acceptance speech at the Republican National Convention. He's referring to the amount of money the U.S. spends in importing oil. But the number is inflated. In fact, we actually pay more like $536 billion for the oil we need. And one-third of those payments go to Canada, Mexico and the U.K.

(Note: A few of our readers messaged us, after we first noted McCain's mistake, with the thought that he was referring to foreign aid and not to oil. If so he's even farther off than we supposed: The entire budget for the State Department and International Programs works out to just $51.3 million.)

Tax Cut Recipients

Obama overstated how many people would save on taxes under his plan:
Obama: My definition – here's what I can tell the American people: 95 percent of you will get a tax cut. And if you make less than $250,000, less than a quarter-million dollars a year, then you will not see one dime's worth of tax increase.
That should be 95 percent of families, not 95 percent of "American people." An analysis by the Urban-Brookings Tax Policy Center found that Obama's plan would decrease taxes for 95.5 percent of families with children. Overall, 81.3 percent of households would get a tax cut under his proposal.

Health Care Hyperbole

Obama and McCain traded incorrect statements on each other's health care plan.
Obama: So you may end up getting a $5,000 tax credit. Here's the only problem: Your employer now has to pay taxes on the health care that you're getting from your employer.
As we said before, McCain’s plan doesn’t call for taxing employers on health care benefits; it would instead tax employees. As the law stands now, employees don’t pay taxes on the dollar value of their health insurance benefits. Under McCain’s plan, they would.

McCain also misrepresented Obama's plan when he said that his opponent favored "handing the health care system over to the federal government."
McCain: Well, I want to make sure we're not handing the health care system over to the federal government which is basically what would ultimately happen with Senator Obama's health care plan. I want the families to make decisions between themselves and their doctors. Not the federal government.
McCain made a similar claim in his acceptance speech, when he said that
Obama's plans would "force families into a government run health care
system." We called it false then and we stand by that. Obama's plan mandates coverage for children, but not for adults, and it does not require anyone to be covered by a nationalized system. Obama's plan expands the insurance coverage offered by the government, but allows people to keep their own plans or choose from private plans as well.

Ike Was No Quitter

McCain mangled his military history:
McCain: President Eisenhower, on the night before the Normandy invasion, went into his room, and he wrote out two letters.
One of them was a letter congratulating the great members of the military and allies that had conducted and succeeded in the greatest invasion in history, still to this day, and forever.

And he wrote out another letter, and that was a letter of resignation from the United States Army for the failure of the landings at Normandy.
The story is widely circulated in military circles but not entirely true. Eisenhower (then a general, not yet a president) did in fact write a letter taking responsibility should the D-Day invasion fail. But Eisenhower's letter does not mention resigning. Here's the full text:
Eisenhower (June 5, 1944): Our landings in the Cherbourg-Havre area have failed to gain a satisfactory foothold and I have withdrawn the troops. My decision to attack at this time and place was based on the best information available. The troops, the air and the Navy did all that bravery and devotion to duty could do. If any blame or fault attaches to the attempt it is mine alone.
No mention of quitting the Army, or his command.

A Longer Timetable

Obama stretched out his schedule for withdrawing troops from Iraq. During the debate, Obama said we could "reduce" the number of combat troops in 16 months:
Obama: Now, what I've said is we should end this war responsibly. We should do it in phases. But in 16 months we should be able to reduce our combat troops, put – provide some relief to military families and our troops and bolster our efforts in Afghanistan so that we can capture and kill bin Laden and crush al Qaeda.
But in Oct. 2007, Obama supported removing all combat troops from Iraq
within 16 months:
Obama (Oct. 2007): I will remove one or two brigades a month, and get all of our combat troops out of Iraq within 16 months. The only troops I will keep in Iraq will perform the limited missions of protecting our diplomats and carrying out targeted strikes on al Qaeda. And I will launch the diplomatic and humanitarian initiatives that are so badly needed. Let there be no doubt: I will end this war.
The quote appears in "Barack Obama and Joe Biden on Defense Issues" – a
position paper that was still available on the campaign's Web site as Obama spoke.
Still Soft on Iran?

McCain repeated the false insinuation that Obama opposed naming Iran's Islamic Revolutionary Guard Corps as a terrorist organization.
McCain: There is the Republican Guard in Iran, which Senator Kyl had an amendment in order to declare them a sponsor of terror. Senator Obama said that would be provocative. ...

Obama: Well, let me just correct something very quickly. I believe the Republican Guard of Iran is a terrorist organization. I've consistently said so. What Senator McCain refers to is a measure in the Senate that would try to broaden the mandate inside of Iraq. To deal with Iran.
Obama has in fact said that the IRGC should be named a terrorist group. He was a cosponsor of the Iran Counter-Proliferation Act, which, among other things, named the IRGC a terrorist organization. What he voted against was the Kyl-Lieberman amendment, which also called for the terrorist group distinction. But Obama said that he opposed the amendment on the grounds that it was "saber-rattling."
Obama press release (Sept. 26, 2007): Senator Obama clearly recognizes the serious threat posed by Iran. However, he does not agree with the president that the best way to counter that threat is to keep large numbers of troops in Iraq, and he does not think that now is the time for saber-rattling towards Iran. In fact, he thinks that our large troop presence in Iraq has served to strengthen Iran - not weaken it. He believes that diplomacy and economic pressure, such as the divestment bill that he has proposed, is the right way to pressure the Iranian regime. Accordingly, he would have opposed the Kyl-Lieberman amendment had he been able to vote today.
Who's Naive on Georgia?

McCain called Obama's initial statement on the conflict in Georgia "naive." It's worth noting Obama's words echoed those of the White House.
McCain: Well, I was interested in Senator Obama's reaction to the Russian aggression against Georgia. His first statement was, "Both sides ought to show restraint."

Again, a little bit of naivete there. He doesn't understand that Russia committed serious aggression against Georgia.
It's true, as McCain said, that during the conflict between Georgia and Russia, Obama said, "Now is the time for Georgia and Russia to show restraint, and to
avoid an escalation to full scale war" in his first statement on the conflict. But so did the White House. Press secretary Dana Perino said on Aug. 8, “We urge restraint on all sides – that violence would be curtailed and that direct dialogue could ensue in order to help resolve their differences.” We pointed this out when New York Mayor Rudy Giuliani mischaracterized Obama's response to the crisis during the GOP convention.

Boeing Boasts

McCain was went too far when he said, "I saved the taxpayers $6.8 billion by fighting a contract that was negotiated between Boeing and DOD that was completely wrong. And we fixed it and we killed it."

McCain certainly did lead a fight to kill the contract, and the effort ended in prison sentences for defense contractors. But the contract isn't exactly "fixed" yet. In fact, questions have been raised about the role McCain has played in helping a Boeing rival secure the new contract.

After the original Boeing contract to supply refueling airliners was nixed in 2003, the bidding process was reopened. And in early 2007, Boeing rival EADS/Airbus won the bid the second time around. But Boeing filed a protest about the way the bids were processed, and the Government Accountability Office released a report that found in Boeing's favor. In the summary of GAO's investigation, the organization said there were "significant errors" with the bid process and that the directions given to Boeing were "misleading."

Further, the New York Times reported that "McCain’s top advisers, including a cochairman of his presidential campaign, were lobbyists for EADS. And Mr. McCain had written to the Defense Department, urging it to ignore a trade dispute between the United States and Europe over whether Airbus received improper subsidies." A liberal campaign finance group ran an ad hitting McCain on the connections back in July and our colleagues at PolitiFact found their attacks to be true, saying: "Center for Responsive Politics prepared a report for PolitiFact that backs [the charge] up. U.S. employees of EADS/Airbus have contributed $15,700 in this election cycle to McCain’s campaign."

Nuclear Charges

McCain said Obama was against storing nuclear waste. That's not exactly his position.
McCain: And Senator Obama says he's for nuclear, but he's against reprocessing and he's against storing.

Obama: I -- I just have to correct the record here. I have never said that I object to nuclear waste. What I've said is that we have to store it safely.
Obama's official position is that he does support safe storage of nuclear waste:
Obama fact sheet: Obama will also lead federal efforts to look for a safe, long-term disposal solution based on objective, scientific analysis. In the meantime, Obama will develop requirements to ensure that the waste stored at current reactor sites is contained using the most advanced dry-cask storage technology available. Barack Obama believes that Yucca Mountain is not an option. Our government has spent billions of dollars on Yucca Mountain, and yet there are still significant questions about whether nuclear waste can be safely stored there.
But the McCain campaign has attacked Obama before on this issue, going as
far as to claim Obama did not support nuclear energy at all, which was false. Obama has said he supports nuclear as long as it is "clean and safe."

Against Alternative Energy

Obama said that McCain had voted 23 times against alternative energy:
Obama: Over 26 years, Senator McCain voted 23 times against alternative energy, like solar, and wind, and biodiesel.
Here's the Obama campaign's list of the 23 votes. We find they're overstating the case. In many instances, McCain voted not against alternative energy but against mandatory use of alternative energy, or he voted in favor of allowing exemptions from these mandates. Only 11 of the 23 votes cited by the Obama campaign involve reducing or eliminating incentives for renewable energy.

Meanwhile, McCain was indignant at the suggestion that he'd voted against alternative energy at all.
McCain: I have voted for alternate fuel all of my time. ... No one can be opposed to alternate energy.
But McCain's record says differently. As we say above, he has voted against funding for alternative energy on 11 occasions. He may be in favor of alternative energy in theory, but he has declined opportunities to support it.

In McCain's energy plan, he supports nuclear power and "clean" coal, which are alternative energies. But they don't qualify as renewable energy, such as hydro,
solar and wind power. McCain's plan makes a vague promise to "rationalize
the current patchwork of temporary tax credits that provide commercial
feasibility." The experts we talked to weren't sure what exactly that meant.

Committee Oversight

Both candidates were right in talking about Obama’s NATO subcommittee.
McCain: Senator Obama is the chairperson of a committee that oversights NATO, that's in Afghanistan. To this day he's never had a hearing. …

Obama: Look, the -- I'm very proud of my vice presidential selection, Joe Biden, who's the chairman of the Senate Foreign Relations Committee. And as he  explains and as John well knows, the issues of Afghanistan, the issues of Iraq, critical issues like that don't go through my subcommittee because they're done as a committee as a whole.
As we've already reported Obama's subcommittee on Afghanistan does have jurisdiction over NATO, which is supplying about half of the troops in Afghanistan. His subcommittee does not have jurisdiction over Afghanistan proper.

Getting the Dates Wrong

We also caught McCain getting his congressional history a little wrong.
McCain: Back in 1983, when I was a brand-new United States congressman,
the one -- the person I admired the most and still admire the most, Ronald
Reagan, wanted to send Marines into Lebanon. And I saw that, and I saw the
situation, and I stood up, and I voted against that because I was afraid
that they couldn't make peace in a place where 300 or 400 or several
hundred Marines would make a difference. Tragically, I was right: Nearly
300 Marines lost their lives in the bombing of the barracks.
This isn’t quite right. Marines were initially deployed to Lebanon in August 1982. McCain, however, was not elected to the U.S. House until November 1982, more than three months after Marines had already landed.

McCain is referring to a 1983 vote to invoke the War Powers Act. That bill, which Ronald Reagan signed into law on October 12, 1983, authorized an 18-month deployment for the Marines. On October 13, a suicide bomber destroyed the Marine barracks in Beirut. McCain did in fact break with most Republicans to vote against the bill.

FactCheck.org: FactChecking Debate No. 1

Democrats cut earmarks by 23% in 2 years.

Since the Democrats took over in 2006 earmark spending has been reduced by 23%.
Washington, D.C. – Congress has cut earmarks by 23 percent from the record 2005 levels, according to a new groundbreaking analysis and database of congressional earmarks released today by Taxpayers for Common Sense, a national budget watchdog organization.  The database can be accessed at www.taxpayer.net.

McCain is no patriot! why does he hate america?

Where's McSame's flag pin?

If only the govt would give us money to lobby them with!

The financial services industry, which has spent billions on lobbying and campaign contributions over the last decade, is scrambling to make its case for a proposed $700 billion bailout plan amid deep public skepticism. Wall Street firms, commercial banks and insurers are lobbying on an array of issues -- from beating back proposals to make it easier to reduce mortgage debts in bankruptcy courts to fighting, unsuccessfully so far, to retain control over executive pay.

Ask Yourself Why... They Didn’t See This Coming - Common Cause

Countrywide, Fannie Mae, Freddie Mac, IndyMac, Lehman Brothers, Merrill Lynch and the American International Group (AIG) have all basically collapsed under the weight of the housing crash. And it’s not over yet.


About 100,000 homes went into foreclosure in August,[i] and analysts are still predicting another wave of foreclosures.[ii] There are more than 2 million vacant homes on the market – the most ever recorded. Estimates of total foreclosures run as high as 3 million for 2007 and 2008[iii].


These foreclosures were caused, in large part, by the popular subprime adjustable rate mortgages (ARM) – loans to people with bad credit or no credit – that gave everyone a piece of the American dream during the housing boom. Referred to as “exploding ARMs,” many subprime loans “reset” after an introductory period, sometimes doubling the borrower’s monthly payments. This, combined with the decrease in value of the borrower’s home, drove many families into default and foreclosure. Although consumer groups protested the sale and resale of these loans for years, the financial industry used its political power, measured in the millions of dollars spent in campaign contributions and lobbying, to hold government regulators at bay.


Poor neighborhoods and often African-American and Latino neighborhoods have seen the highest incidence of subprime loans and housing foreclosures. According to an analysis of federal loan data, 71 percent of African-Americans in Michigan who bought or refinanced their home last year received a subprime loan.[iv] Demos, a non-partisan public policy research and advocacy organization, recently reported: “African-American and Latino homeowners are twice as likely to suffer subprime-related home foreclosures … Estimates place the total loss of wealth among households of color at between $164 billion and $213 billion ...  the greatest loss of wealth to people of color in modern American history.”[v]


What is most troubling about this historic episode is that the problems were identified years ago. Yet, thanks in part to the political power of the financial institutions that stood to gain from the frenzy of borrowing and buying during the housing boom, the government refused to step in or even slow the breathtaking growth of unsustainable lending.


This report, the latest in the Ask Yourself Why series, looks at the government’s response to the housing crisis and its effects on homeowners. It discusses the connection between the lobbying and campaign contributions of the financial services industry and Congress’ unwillingness to prevent or respond forcefully to one of the biggest financial crisis in recent history. For many years, especially during the housing boom, the financial services industry successfully steered government policy away from more hands-on regulation of the lending market. And in the end, the biggest losers in this story are not the thousands of now-unemployed Wall Street brokers, but the low income and minority neighborhoods that have been the focal point of the bad lending itself.


The Build-up


As the housing market took off, so did the more questionable lending practices of financial services companies. The total value of subprime loans went from $97 billion in 1996 to $640 billion in 2006, increasing from 12 percent to 21 percent of the total market.[vi] These risky mortgages took off because each player in the process believed they could collect while passing the risk of default onto the next guy. Mortgage brokers were not lending their own money, so they pushed risks onto the lenders. Lenders sold the mortgages to investment banks, which packaged them into securities and then sold pieces of them to investors all over the world.[vii] The inherent problem of this system must have been visible to members of Congress and the Bush administration a long time ago, but they chose not to act.


In 2000, the National Consumer Law Center and Consumer Federation of America submitted comments to the Office of Thrift Supervision warning of the growth in the market for subprime loans:


The inflation in real estate values in the 1980s … continues to make aging homeowners a prime target of predatory lenders...  The appreciated value of the property led to "asset-based lending" … [which] is a legitimate-sounding justification to ignore sound underwriting principles, and make unaffordable loans... The 1990s saw the phenomenal growth in the use of asset-based securities to fund an ever-increasing supply of mortgage credit... “Subprime” homeowners are the hot new market of the 1990s... The securitization of home equity loans is a driving force behind the subprime market popularity.[viii]


In early 2005, during debate on the landmark bankruptcy legislation, which made it more difficult for individuals to declare bankruptcy, Senator Dick Durbin (D-IL) offered an amendment to discourage predatory lending practices. The amendment prohibited mortgage lenders from collecting on claims in bankruptcy court if the lenders illegally extended credit to borrowers. Upon introducing the amendment, Senator Durbin made the following remarks on the Senate floor:


As predatory mortgage lending increases, it continues to target lower income women, minorities, and older Americans. In 1998, Senator Grassley of Iowa, my friend and colleague and the author of the bankruptcy bill, held a hearing in the Senate Special Committee on Aging looking into predatory lending. At the hearing, this is what a former career employee of that industry had to say… My perfect customer would be an uneducated woman who is living on a fixed income, hopefully from her deceased husband’s pension and Social Security, who has her house paid off, is living off credit cards but having a difficult time keeping up her payments, and who must make a car payment in addition to her credit card payments… Mr. President, 1 in 100 conventional loans ends in foreclosure, but 1 in 12 subprime predatory loans ends in foreclosure… the magnitude of the differences tells us that there is more at stake here than just the creditworthiness of the borrower. (emphasis added)[ix]


The amendment was defeated in the Senate by a vote of 40 to 58.


In 2006, the Center for Responsible Lending (CRL) issued the results of a nationwide review of millions of subprime mortgages that originated from 1998 through the third quarter of 2006. In the report, CRL projected that one out of five (19.4%) subprime loans issued during 2005-2006 would fail, costing American families as much as $164 billion due to foreclosures in the subprime mortgage market.[x] Speaking to the Boston Globe earlier that year, Thomas Callahan, executive director of the Massachusetts Affordable Housing Alliance said: “People have put problems off by multiple financings and increasing equity. I have a sense it could get ugly soon.”[xi]


In early 2007, Jim Rokakis, the County Treasurer for Cuyahoga County in Ohio, delivered the following testimony to the Subcommittee on Domestic Policy, Committee on Oversight and Government Reform in the U.S. House of Representatives:


For at least the past seven years urban leaders in cities like Cleveland, Dayton, Toledo, Cincinnati, and other older, more mature cities throughout America have been decrying the explosion in foreclosure filings in their communities. They have complained of abandonment, of property flipping and of a lending industry that was behaving so irresponsibly that we were convinced that someday that a segment of that industry—the subprime sector—would implode. We complained of no document loans and of Adjustable Rate Mortgages that would reset at a rate that would be well beyond the means of the borrower. We complained of borrowers known as NINJA’s-No Income-No Job-No Assets—who were buying properties, often multiple properties, often with no down payments. We complained of fraud on an unprecedented scale that involved buyers, sellers, brokers, bankers and appraisers. We pleaded for help at the State level Mr. Chairman but were no match for the lobbying team assembled by the mortgage brokers, the mortgage bankers and financial services industry … (emphasis added)[xii]


In late 2007, AARP, AFL-CIO, the Center for Responsible Lending, the Consumer Federation of America and the National Fair Housing Alliance wrote an open letter to all members of the House of Representatives, which stated:


…in recent years, subprime lending has been dominated by unaffordable, complex loan products that borrowers do not understand and lenders do not properly underwrite. Many subprime loans and exotic prime loans are underwritten – if at all – only to a low teaser rate, which typically lasts just two or three years, and sometimes far less. These loans also usually contain costly prepayment penalties that penalize and trap borrowers, preventing them from refinancing into a more affordable loan.[xiii]


All of this has been overshadowed by the historic bailout of the financial services industry as the Bush administration took control of Fannie Mae and Freddie Mac and assumed a majority stake in AIG, by committing $85 billion to keep that company afloat. Two other titans of Wall Street, Lehman Brothers and Merrill Lynch have disappeared.


The problems that led to the demise of these companies trace back to an overexposure to bad loans made during the housing boom. But because there was good money to be made in bad mortgages – and little or no federal regulation of predatory or unsustainable lending – the industry flooded the market with easy credit.


Government Response: Voluntary Programs Only


In July, the first substantial piece of legislation to address the mortgage crisis was passed by Congress and signed by the President. While this legislation included some new provisions to help homeowners avoid foreclosure, much of it was too little too late. The bill did include a grant of approximately $3.9 billion certain homeowners could access to refinance their mortgages, but only if their lenders voluntarily agreed to take substantial losses on the existing loans. While this option would be attractive to some lenders because it would likely lose money if the property went into foreclosure, it ultimately depends on voluntary action on the part of banks and lenders.


To date, this approach has had limited affect. The State Foreclosure Prevention Working Group recently reported that only 24 percent of seriously delinquent borrowers were working with professionals toward preventing foreclosure.[xiv] Foreclosures still outnumber loan modifications three-to-one, and the numbers of delinquencies and foreclosure starts will continue to rise through 2008 and 2009 as another round of subprime “resets” kicks in.[xv] As a recent New York Times article reads: “The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.”[xvi]


The shortcomings of this purely voluntary system are further heightened by the growth in mortgage-backed securities – meaning that many home loans are owned by investors all over the world, rather than just the bank down the street. In order for lenders to voluntarily modify the terms of a loan, all the parties who own a stake in that loan must agree to the new terms. Congress’ reliance on voluntary loan modifications, as the financial companies prefer, disregards the prospect of investor lawsuits and “piggyback” loans (second liens) that make voluntary modifications difficult.[xvii] If any investor stands to lose more than another as a result of the modification, or could make more from moving to foreclosure (which is not uncommon), they can sink any new agreement and push the loan to foreclosure. As the Former Federal Reserve Board Vice Chairman Alan Blinder said, the emergence of securitized mortgages sold and resold to investors across the globe “bolsters the case for government intervention rather than undermining it. After all, how do you renegotiate terms of a mortgage when the borrower and the lender don’t even know each other’s names?”[xviii]


Another option considered by Congress was to allow a bankruptcy judge to adjust the value of a loan to reflect the current value of the home. Current bankruptcy law exempts first mortgages from the jurisdiction of a bankruptcy court. In all other cases, such as a vacation or rental property, a bankruptcy judge could modify the terms of the loan between creditors and borrowers as part of a long-term solution. But the financial industry has successfully opposed this route as a response to the mortgage crisis because it could cost the companies big for making bad loans. Proponents of this measure argue that it is the cleanest, easiest way to strike at the heart of the problem many homeowners now face – a home that has lost value and is now worth less than their mortgage. More than one-third of families in this situation, known as being “underwater,” have not benefited from voluntary modifications by their lender.[xix]


Former Housing and Urban Development (HUD) director and U.S. Congressman Jack Kemp recently wrote in the Los Angeles Times: “When servicers are unwilling or unable to voluntarily modify exploding, unsustainable home mortgage loans, Congress has a duty to consider involuntary modification in bankruptcy court, where the same relief is granted on all other secured loans.”[xx]


The Democratic leadership originally introduced legislation that included a provision to temporarily give bankruptcy judges the authority to modify subprime and nontraditional mortgages. The measure was eventually stripped from the original package but reintroduced in HR 3609, the “Emergency Home Ownership and Mortgage Equity Protection Act,” and S. 2136, “Helping Families Save Their Homes in Bankruptcy Act,” by Representative Brad Miller (D-NC) and Sen. Durbin, respectively.


In a letter to Senate Majority Leader Harry Reid (D-NV) and Senate Minority Leader Mitch McConnell (R-KY) in February, a group known as the Bankruptcy Coalition wrote that allowing bankruptcy judges to modify the terms of mortgages, “would undermine the recovery of the housing market and the economy … This provision will have the exact opposite effect intended by increasing the cost of mortgages for all borrowers in the form of higher interest rates or down payments, or both.”[xxi] Members of the Bankruptcy Coalition spent more than $65 million in lobbying and campaign contributions since the beginning of 2007.


Lobbying and Contributions: Members of Bankruptcy Coalition








American Bankers Association





American Financial Services Association





Bank of America










Consumer Bankers Association*





Countrywide Financial Corporation





Financial Services Roundtable





Huntington Bancshares





Ind. Community Bankers of America





Mortgage Bankers Association















Source: Center for Responsive Politics

* Includes only contributions from political action committee



The Mortgage Bankers Association (MBA) lobbied hard against the proposal. “Giving judges free rein to rewrite the terms of a mortgage would further destabilize the mortgage backed securities market and will exacerbate the serious credit crunch that is currently hindering the ability of thousands of Americans to get an affordable mortgage,” said Kurt Pfotenhauer, Senior Vice President for Government Affairs and Public Policy for MBA.[xxii] 


However, Adam J. Levitin, Associate Professor of Law at Georgetown University Law Center evaluated MBA’s claim based on housing market research. “There is no empirical evidence that supports a conclusion that permitting either strip-down or other forms of modification of principal home mortgage loans in bankruptcy would have more than a minor impact on mortgage interest rates or on home ownership rates… MBA's claim of an effective 150-200 basis point increase from allowing strip-down is groundless.”[xxiii]


Other academics also weighed in on the proposal by comparing it to the financial crisis in the farming industry almost thirty years ago. During the 1980s, many family-owned farms in the Midwest faced a financial crisis that also forced families to seek bankruptcy protections. As part of the response to that crisis, Congress passed the Family Farmer Bankruptcy Act of 1986, which created a new Chapter 12 bankruptcy to amend the Bankruptcy Code. According to Professor Susan A. Schneider at University of Arkansas School of Law, an expert in agricultural law and farm finance and bankruptcy: “[T]he concerns raised in opposition to Chapter 12 did not materialize in any respect. The availability of credit to the agricultural sector has increased over time, not decreased. Interest rates did not increase because of the availability of Chapter 12. Instead, like other loans they have consistently reflected over-all market conditions.”[xxiv]


Senator Durbin attempted to attach the bankruptcy bill to the larger Senate housing package as an amendment. It was voted down by a vote of 58 – 36. Some members who cosponsored the original housing legislation, such as Sen. Joseph Lieberman (I-CT), later voted against the bankruptcy provision in the stand-alone bill. Many of the financial services corporations are based in Connecticut – two of the top five contributors to Sen. Lieberman since 2003 are Lehman Brothers ($154,650) and the now-defunct Bear Stearns ($103,260). The House version was never even considered on the floor.


Even with passage of the recent housing bill, Congress has not passed any legislation in response to the mortgage meltdown and housing crisis that the lending industry has opposed. After all that has come to light about the abusive lending practices of the financial industry to vulnerable American families, Congress still seems afraid to move aggressively. The housing package President Bush just signed into law does not include any changes to Bankruptcy Code, sticking instead to a system of voluntary modifications by the lending industry, albeit with tax dollars to help pay for some of the losses.


Fannie and Freddie


The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, nicknamed Freddie Mac, invested more than any other company in risky subprime loans that were being securitized and sold on the secondary market,[xxv] despite the warnings of groups like National Consumer Law Center and Consumer Federation of America. This had the effect of bestowing subprime-backed securities with more legitimacy while also shrinking the market for more sound investments.


Until their collapse and government takeover, both companies had managed to avoid government intrusion even though they have been at the center of controversy before. Both have had multibillion-dollar accounting scandals. In 2003, Freddie Mac understated billions in profits to smooth earnings reports. In 2004, the Securities and Exchange Commission ruled that Fannie Mae had overstated profits by an estimated $9 billion. The housing bill also leaves management of Fannie and Freddie untouched and imposes no penalties on their shareholders.


In 2004, the chief risk officer at Freddie Mac reportedly told the CEO at the time, Richard F. Syron, that the company was exposing itself to the possibility of significant losses by purchasing too many risky loans thanks to a loosening of underwriting standards. Mr. Syron increased subprime mortgage purchases against the recommendations of his staff. Mr. Syron, who left the job in 2005, received $38 million in total compensation since 2003, even as Freddie Mac lost $80 billion in shareholder value – largely as a result of investments made during Mr. Syron’s tenure.[xxvi]


Former member of the House Financial Services Committee Jim Leach (R-IA) has long advocated reining in the two companies, describing Fannie and Freddie in October 1991 as “an arrogant, two-headed monopoly, controlling 90 percent of the market.”[xxvii] In a recent statement titled, “Fixing Fannie and Freddie,” Leach writes:


The legislated perks granted Fannie Mae and Freddie Mac are of a multi-billion dollar yearly magnitude and the regulatory advantages they enjoy magnify the capacity of each to grow. It is no accident that no commercial companies in the past generation have had as muscular a lobbying operation on Capitol Hill. When, for instance, I once introduced a battery of constraining amendments, including a doubling of capital requirements, to legislation favorable to Fannie and Freddie, it took each less than 48 hours to orchestrate both parties’ leadership to weigh in against trimming their wings of privilege.[xxviii]


To some extent, Fannie and Freddie were proxies for the entire financial services industry. They own or guarantee about half of the country’s $12 trillion in mortgage debt and have the most extensive network of connections with lawmakers and government officials of perhaps any other companies. They invested more than $400 billion in dicey subprime-backed securities over the last several years; further inflating the mortgage bubble, and now the government has been forced to assume the losses.


Contributions and Lobbying: Freddie Mac




% to Dems

% to Repubs













































Contributions and Lobbying: Fannie Mae




% to Dems

% to Repubs







































Source: Center for Responsive Politics

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