When the next election cycle comes around, I would like to suggest that everyone just disregard all statements made by their legislator that implies any surprise or disapproval of the mortgage industry’s shenanigans, because seriously - it’s all a farce.

I’ve read quite a bit of political and economic news and over the last few months, I’ve found that any kind of article involving indignant legislators is all of a sudden very easy to skim. Being able to substitute “blah blah blah yada yada yada” for entire paragraphs can seriously condense an article, you see.

Take, for example, this article in the Voice of America news about mortgage lenders defending themselves in front of Congress:

“Their own risk managers raised warning after warning about the dangers of investing heavily in the sub prime and alternative mortgage market,” said Henry Waxman. “But these warnings were ignored”

Blah blah blah.

“Your whole excuse for going to risky and unreasonable loans that are defaulting at an incredibly high rate is that everyone is doing it,” said Daryl Issa. “If we don’t do it, we’ll be left out.”

Yada yada yada.

And this whole bit with Kucinich:

KUCINICH: “Do you take responsibility for the risks that your company took when you ignored the advice of your credit risk officer and when you cut the budget, do you take that responsibility?”

MUDD: “I followed the process to listen to all of my staff, not just the chief risk officer.”

KUCINICH: “But what did you do though. What did you do. Did you cut the budget of your credit risk officer?”

MUDD: “Just liked all budgets, as long as I have been involved in business we negotiated the right number for the people that he could hire.”

KUCINICH: “Is the answer yes or no, did you cut your credit risk officer’s budget?”

Whatever, Yoda.

I’m not going to defend mortgage lenders but frankly, if I was in charge of Freddie or Fannie, I’d be pretty mad at the way these folks were talking to me. It’s not that Fannie and Freddie were unaware of the dangers of the sub-prime market or the inevitable collapse that would occur, it’s that they were stuck between a political rock and a hard place.

Taking Fannie Mae into account particularly, remember that although they are a public company, they were created by Congress. Their whole existence is about buying and securitizing mortgages from other lenders so that money is constantly available to lend to folks wanting to buy a home. THAT IS WHAT THEY DO. Freddie Mac was created, also by the government, to compete with Fannie Mae in 1970  … which is really odd when you think about it … but their job is the same.

The “blame Clinton for this entire mess” crowd likes to point to how he encouraged Fannie and Freddie to reach out to lower and middle income families, and that’s a fair accusation. But in Fannie and Freddie’s defense, when the President of the United States tells a government created organization to do something, I would imagine it is difficult to say no - and frankly, the sentiment was good. Owning a home is the American Dream, after all.

Still, even in 1999, there was plenty of warning about the possible pitfalls. From the New York Times on September 30, 1999:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Imagine that.

And remember that at the same time this was happening, the “blame the Republicans for this entire mess” crowd can point to the Gramm-Leach-Blilely  (I like to point to it a lot, actually), which overturned Glass Steagall and allowed conservative banks to hook up with investment companies. That gave investment companies access to more conservative bank money.

Can you imagine the conversations in the halls of Washington DC back in the day? “If you guys want to loan to everyone and their uncle, you’re going to have to convince the banks to lower their lending standards. They can’t do that because they can’t take the risk, but if you pass this bill and let investment companies get in on the action, those geniuses should be able to invest well enough to make up for the possible increase in default risk.”

Without doing a bunch of research to verify, I am 100% confident that a statement very close to that was made at some point, because it actually makes sense.

But the one thing that politicians in the late 90’s would not have wanted to say in public if they wanted to get re-elected is, “no, we can’t support reaching out to lower and middle income people to increase home ownership” because what that really meant was “no, we can’t support reaching out more to minorities.”  Again from the New York Times in 1999:

… at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

So. All of that is one big long coffee driven rant that comes back to this: Take all of the Congressional finger waving and tongue wagging for what it is - a photo op. The housing and mortgage meltdown wasn’t a surprise. Maybe Fannie Mae and Freddie Mac could have fought harder to warn the government and the public about the inevitable failure of what was going on, but their voices would probably have been drowned out by the politicians who needed a strong looking economy in order to get re-elected.

The same politicians who need to blame someone now.

So, follow along with me for a moment.

Let’s say Bert and Ernie, long time roommates and friends, decided in 2005 to buy a brownstone on Sesame Street instead of paying rent for a basement apartment. They go to their friendly not-in-their-neighborhood mortgage broker to get qualified for a loan. Bert and Earnie have to do apply for the loan with stated income since neither of them has a regular day job, but this isn’t a problem in 2005.

Since the real estate market in New York City, and especially the always popular Sesame Street area, is outrageous. they also ask for low teaser rate ARM with an interest only feature. Their intention is to still live in the basement but to rent out the rest of the place in order to pay the mortgage, which will be a great cash cow after a few renovation expenses out of the way. Once they get going, they’ll refinance to a fixed rate, principal and interest loan.

The mortgage broker’s firm takes their mortgage, along with all of the other ones they’ve originated that month, and sells them to an investment firm that bundles them up into a different packages, and sells them to investors. Some packages are comprised of loans given to people with perfect credit and who makes lots of money and are therefore considered at very low risk to default. Others include mortgages like Bert & Ernie’s stated income interest only variable rate loans. The low risk ones pay slightly lower rates to investors, and the high risk ones pay higher rates. Both, however, somehow end up with excellent credit ratings from debt rating firms.

Fast forward three years.

Bert and Ernie have done their renovations and have been looking for tenants, but the economy has hit the skids. Monsters are leaving Sesame Street left and right, or moving back in with their parents. The only person with a stable job is Oscar (there will always be trash) and he’s content in his can. Bert and Ernie can’t find anyone to move in, and the rate on their mortgage just flipped up 2% and will go up another 2% next year.

Thank goodness for the bailout!

By choosing from one of several programs, Bert and Ernie were able to modify the terms of their loan in order to bring their payments to a reasonable level and avoid foreclosure.

The story doesn’t end there, though. Now that their loan payments have been modified downward, the cash flow that comes from that loan ultimately to the investor that purchased the package it’s in has also declined. To add insult to injury, since the returns on the investment have gone down, the current investor can’t even sell to another party without taking a hit on the principal amount either.

Multiply that by the 400,000 real loans that may be modified by Bank of America and you end up with one very ticked off investor who is suing the bank. From Business Week:

The battle over the mass modifications of troubled mortgages has begun in earnest. On Dec. 1, William Frey, a private investor in mortgage-backed securities, filed a lawsuit in New York State Supreme Court alleging that the proposed modification of some 400,000 home loans originally underwritten by the defunct lender Countrywide Financial is illegal.

The lawsuit , which seeks class-action status, was filed against Bank of America (BAC), which bought Countrywide in late 2007. It argues that most of the Countrywide loans are not Countrywide’s or Bank of America’s to modify, but rather are owned by trusts that bought them through securitization—the process of financing home loans through the public markets by parceling them out to investors.

Now, Mr. Frey isn’t just any old investor. He owns a broker dealer that specializes in mortgage backed securities and would therefore be particularly impacted by widespread loan modifications. His personal net worth would likely be affected as well as that of any clients who had invested with his company.

Mr. Frey says that he has not put together any securities using subprime mortgages in years because he believed them to be too risky, which was a good move, but the current economic downturn and bailout efforts are impacting more than just the subprime market.

His feeling is that the loan servicers are going to  modify loans instead of foreclosing and that these modifications are a breach of the contract that mortgage backed securities companies essentially set up with investors. In other words, when investors bought these highly rated securities, they were counting on a “business as usual” economy where people who couldn’t pay their bills would be foreclosed and even that wouldn’t happen very often, but they could generally count on the return on their investment staying consistent.

He also believes that changing the game half way through when it comes to mortgaged backed securities will hurt the secondary market for these products and therefore reduce the lending pool for Americans to purchase homes.

He’s not wrong and as the manager of a firm that makes its living on these products, it’s almost required that he step and try to defend the interests of his investors, but he’s no saint either. Essentially, he’s asking for a bailout for his investors - at taxpayer expense, of course:

Frey says a more reasonable, albeit unpopular, solution would be for the government—that is, taxpayers—to ante up another $500 billion to buy all of the troubled loans from mortgage-backed securities pools in order to keep the public market for financing mortgages viable.

Buy out ALL of the troubled loans in order to shift the risk from private investors to taxpayers. Nice thought, Mr. Frey. And yet, to be fair, I kind of see his point. It’s enough to give a girl a headache.

But for the record? I still think my plan is better.

As we move through this newly admitted recession that everyone already knew about, news about mortgage bailouts and auto bailouts and who-knows-who’s-next bailouts comes fast and furious.

For example, credit card companies have asked to be allowed to write down principal, a request which was denied by regulators in November because it also included a request to allow borrowers to defer paying income tax and lenders to defer including those losses in their financials. The government has decided that it is imprudent and misleading for credit card companies to not post the losses they would experience immediately, and that makes sense.

In the mortgage industry, however, the standards are a little different. If a homeowner loses a home to foreclosure or has a modification to a loan that includes reducing the principal owed, income taxes on the forgiven amount are waived. This law was originally enacted to cover debt forgiven in 2007, 2008 and 2009 but has since been extended to 2013. From the IRS website:

Homeowners whose mortgage debt was partly or entirely forgiven during 2007 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their 2007 federal income tax return, according to the Internal Revenue Service.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on this Web site.

[...]

The debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.

Combined with the tax relief, mortgage holders should be aware that there are several options available if house payments are a burden. FHASecure and HOPE for Homeowners are available now, and the newly announced Streamlined Modification Program will go into effect December 15th.

Under the Streamlined Modification Program and similar in some ways to FHA Secure and HOPE for Homeowners, borrowers with loans from certain providers (some of which can be found within the same list as lenders who are working with HOPE for Homemakers, but not all - contact your lender to see if they are participating) may be able to renegotiate the terms of their mortgage to avoid foreclosure or bankruptcy.

In order to qualify, homeowners must be delinquent 90 days already, owe at least 90% of the current value of your home, live in the home as a primary residence, not have filed for bankruptcy, and be paying more than 38% of their gross monthly income towards their mortgage.

The adjustments to mortgages may not necessarily include debt forgiveness, though. Participating lenders are going to resist debt forgiveness as a first alternative, opting instead to either lower interest rates or extend the terms of a loan. In other words, a thirty year mortgage may turn into a forty year mortgage, which means on a $150,000 mortgage at 5%, the interest actually paid over the life of the loan would go from about $140,000 to nearly $200,000, assuming the borrower actually stayed in the house that long.

Even with that rather hefty “penalty,” the new program may be a lifesaver to many families who just need to bridge this economic downturn - but only if used prudently and honestly. Interest-only loans and variable rate loans were also ways for families with faltering cash flow for one reason or another to be able to bridge a tough gap, but over the course of the last several years, those same loans were also a much too easy way for borrowers to buy more house than they could afford or to use the money they “saved” to spend lavishly elsewhere. This new program could be gamed to do the same thing, and it could be quite expensive for the economy as a whole. No, check that - it WILL be quite expensive.

How could someone work the system to take advantage of this program? Simply, really. All a homeowner needs to do is not pay the mortgage for three months and show that their gross income is not enough to support their loan payment. How could the income number be accomplished?

• Max out a home equity loan, if it hasn’t been slashed already, by drawing on the entire amount. It doesn’t need to be spent, it can just sit in a bank account. Remember, it’s INCOME, not assets that count in this equation.
• Go from a two income family to a one income family, especially if one spouse is in a field where jobs are easy to replace such as healthcare or education. The goal is to reduce income just long enough to qualify for the program.
• For self-employed people with unverifiable present income, be pessimistic! The same people who may have fudged on the high side to qualify for a loan in the first place can now feel comfortable with the “glass half empty” approach.

Of course, anyone who tries to get a loan modification through this program has to certify that they’re not being shady, but really, it’s getting to the point where it’s difficult to define “shady” when you see the auto execs rolling into DC to beg for money in their corporate jets, AIG doubling salaries and paying out hefty cash awards, and credit card companies doubling rates virtually risk free to themselves. The tradeoff for people with otherwise stellar credit reports between taking a hit for missing a few payments in order to reduce a monthly payment (or ideally, the entire principal amount of the loan) versus racking up more credit card debt or raiding a 401k plan may be worth the effort.

For a quick overview of the program, go here - Consumer Affairs Streamlined Modification Program Fact Sheet.

Seeing an increase in bankruptcy filings probably isn’t much of a surprise in this economy, but the increase is all the more compelling because of this (from USA Today):

The sagging economy sparked 106,266 consumer bankruptcy filings in October, the first time monthly filings topped 100,000 since the bankruptcy law changed in 2005, the American Bankruptcy Institute said Tuesday.

During the first year after the new law took effect, personal bankruptcy filings plummeted dramatically, and since then, have risen gradually. In October, though, filings jumped 40% over the same month in 2007.

The change in the bankruptcy rules, which was mostly a nice little gift to imprudent lenders everywhere, substantially decreased Chapter 7 filings in particular by making it much more difficult to qualify. Chapter 7 bankruptcy is a liquidation bankruptcy, which means that certain debts can be erased entirely, while Chapter 13 bankruptcy is a reorganization bankruptcy, which means that debts will still be repaid under the watchful eye of the court over a certain amount of time. Whatever is still left at the end of the payoff time may be erased.

Those who earn an income above their state’s median will generally not qualify for a Chapter 7 bankruptcy under the 2005 change in the law, which meant that people either needed to go through the much more time consuming and less “immediate gratification” process of Chapter 13 … or (more likely) just not file at all and try to get by some other way, maybe through family loans or debt settlement programs or by playing a little shell game with balance transfers and home equity loans.

The fact that bankruptcy filings are increasing, and according to the article, increasing in the Chapter 7 category specifically, means that 1) the debt switching game is over, as people are losing their home equity lines due to falling home prices and tightening offers at credit card companies, and 2) people are losing their jobs, putting them below the median price that qualifies them for liquidation instead of reorganization.

Although it would be devastating to the credit card industry, I think the bankruptcy laws need another review when President-Elect Obama gets into office. The law changes in 2005 were clearly a desperate effort to save an industry and an economy that had lost its mind, much to the detriment of the consumer who was being lied to the whole time about the “strength” of the economy, and reversing some of provisions of the law would be a good first step towards that Main Street bailout that most of us seem to find quite elusive.

Regardless of who you were pulling for in the most recent election, you’re probably not pleased with the amount of money you pay in taxes. Income taxes, property taxes, sales taxes, franchise taxes - and for what? Sure, taxes help build infrastructure, provide safety nets and arm the military, but they also pay for many things that we may personally not agree with, like two trillion dollar bailouts to companies who seem unwilling to stop their spendin’ ways.

Most of us will enjoy a tax break if Obama is able to follow through on his plans to cut taxes for everyone who makes under $250,000 but why wait? Why put control of your tax dollars in the hands of any politician when you have a very simple tax cut strategy at your fingertips that can save you thousands of dollars every year?

Curious?

It’s really so simple, it’s delicious.

The best way to cut your taxes is to spend less money.

Yup, it’s that easy. Think about it.

If you drop your cable, not only do you drop the fee for the service, you drop all of the other little fees and taxes they sneak into your bill - even dropping to a less expensive plan can help. Similarly, you could decide whether or not you need a land line if you primarily use your cell phone (we still choose to have one in our home mostly because I want the 911 service, but it’s probably something we should revisit) and drop taxes on that bill as well. Turn down the heater, don’t leave lights on, lower the temperature on your water heater to 120 so that you can drop your your electricity and gas bill and cut utility taxes. Carpool and/or plan your driving trips to conserve gas, a highly taxed product. Try to stop smoking.

Think about sales taxes! In my town, the sales tax is a whopping 8.3%. That means if I went out and bought a big flat screen TV for $2,000, I would pay $166 in sales taxes. If I don’t buy the TV, I don’t pay the taxes.

Plan ahead for your pre-tax deductions. If you use daycare or have medical expenses, have those taken from your paycheck right off the bat so you don’t have to deal with going through all of your receipts at tax time to take the deductions. It’s still a hassle to file claims, but at least you keep up with it throughout the year if you do it that way - and if you have to pay out of pocket and get reimbursed, you could try taking those payments and putting them directly into savings instead of spending them on goods or services that are taxed!

Pay particular attention to your retirement contributions, which we all know is a way to reduce your taxable income (except in the case of Roch contributions), right? Grow to know and love the IRS website, which has plenty of information on how much you can contribute, including whether or not you can contribute as a “catch up” if you are one of our valued older citizens.

And speaking of deductions, maximize them. If you need to punch through a tax bracket, consider taking a break from offering items on Freecycle and channel those used items to charities instead. If you’ve never used income tax software, consider trying out Turbo Tax - it asks all kinds of questions that may prompt you to remember a forgotten expenditure or just let you know about a deduction you didn’t even know existed.

Barter - although barter is technically taxable, the kind of barter I’m talking about is really just about being in your community. A person who owns a nail salon can be taxed for offering manicures in return for a mural painting in the salon, but if you have a friend who is very good at doing nails and you’re good at hair trims, why not trade those services? Babysitting co-ops are common so that stay at home parents can run errands without kids, and you know how when your zucchini plants go crazy and you give some to neighbors, who in turn bring you a few tomatoes from their garden? That’s barter.

The bottom line is that you do not have some patriotic duty to pay some arbitrary bit into the tax pool, and nor are you powerless against either the evil socialist Democrats or the fiscally conservative in-name-only Republicans of the last eight years. Allow your frugal self to be your tax protesting self at the same time.

This entry is included in this week’s Carnival of Personal Finance - be sure to check out more great posts here!

The unbridled audacity of the government is … seriously, I can’t even start to think about how … what the HELL???

Call your Congress Critters, send a letter to Kings Paulson and Bernanke and Bush (not that it’ll matter), write a letter to the editor, and by all means, tell your friends about this one. From Bloomberg:

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

I am aghast and agog. Totally gabberflasted. Please hold while I skim down and try to find their reasoning for not telling the American taxpayer and purchasers of US Treasuries how they’re spending this two TRILLION (that’s $2,000,000,000,000 - just a little under the 2007 GDP of ITALY, the 7th largest economy in the world) …

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

“You have to balance the need for transparency with protecting the public interest,” Talbott said. “Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.”

The nation’s biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed’s disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

“I talk to Geithner and he was pretty sure that they’re OK,” said Frank, a Massachusetts Democrat. “If the risk is that the Fed takes a little bit of a haircut, well that’s regrettable.” Such losses would be acceptable, he said, if the program helps revive the economy.

Frank said the Fed shouldn’t reveal the assets it holds or how it values them because of “delicacy with respect to pricing.” He said such disclosure would “give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” He wouldn’t say why he thought that information would be problematic.

OK, here’s your translation.

Part of the banking industry’s “defense” of themselves in this whole mess is that if they hadn’t been required to price their assets at current market value, there wouldn’t have been a panic. If you’ll recall, we talked a few months ago about how AIG was a bit of a surprise because they were able to “hide” their troubled assets until such time as they had to reprice in order to go raise some capital. The banks and insurance companies think that most of their investments would have turned out OK if they’d just been allowed to hold them to maturity. I actually think that might have been true, except that it still would have been a house of cards because in order to keep the capital flowing through the system, they would have just turned around and funneled that money into similiarly “toxic” debt. It was, I believe, inevitable that it all came tumbling down.

Now that they’re taking taxpayer money, though, they don’t really get to play that game anymore. What taxpayers and investors want to see is not a continuation of business as usual with a big curtain that the banks can hide behind as an experiment to see whether the transparency was good or not. What we want to see is banks making responsible investment decisions. There’s a place for speculation, but it should not be in housing markets with actual mortgage back securities.

Add this to the news a couple of weeks ago that the companies put in charge of the bailout may very well be the very banks that failed - it’s really beyond the pale. The article said that Obama’s office did not return calls, so we don’t know what he thinks of all of this, but Bloomberg has filed suit under the Freedom of Information Act. Good for them.

Wow, these are some stunning numbers. From the Baltimore Sun:

GM said its sales of cars and light trucks tumbled 45 percent from a year earlier. Ford Motor Co. saw a 30 percent decline, and Toyota Motor Corp. posted a 23 percent drop. Honda Motor Co. sales were down 25 percent, and Nissan Motor Co.’s slid 33 percent.

Later in the article, Volkswagen is mentioned with a drop of nearly 8%.

A generally yucky economy isn’t helping, but mostly it’s still about the credit markets - that’s what this bailout was supposed to be about, right?

New lending restrictions by General Motors Acceptance and Chrysler Financial have significantly hindered sales. GMAC offers financing only to consumers with credit scores of at least 700, which excludes 42 percent of Americans, and Chrysler Financial no longer offers leases.

No leases! Huge move from Chrysler. And although I think there’s a point when you just have to say goodbye to your credit score in order to take care of business and start fresh, here’s proof that it’s still important. Since my car has over 100,000 miles on it and my husband’s car has over 200,000 miles on it, being able to get financing in a hurry is something we always have in the back of our minds, even though we probably wouldn’t actually rush to the market if one of our cars broke down. We’d probably check out Swap-a-Lease instead, just to buy some time.

Anyhoo … so what’s next for the auto industry?

I have to wonder if some of this is election related, although I’m not sure why. Those who support Obama may be looking forward to tax cuts, I guess, so maybe they are putting off a purchase. Those who support Mccain and make over $250,000 (seriously, I’d like to see the breakdown on that demographic compared to McCain supporters who make less than $250,000 and will actually see LESS of a tax cut than under Obama) are probably putting off their purchase because when you only make a quarter of a million dollars you really have to pinch your pennies. Is that it?

Still, the election’s always a factor, so I’ll bet we see an uptick for November, regardless of who wins the election. It won’t be enough to forestall a bailout, though, so be prepared for the Socialist Republic of America’s next request for money from taxpayers.

I’m happy to announce that as of October 29th, one more course for my MBA is behind me. It wasn’t my favorite class, but I learned quite a bit nonetheless. I’m fortunate enough to work for a company with an extremely generous tuition reimbursement program and a few months ago when it looked like the economy was really going to go from “slowing down” to “total digger,” I figured it would be wise to add a few letters to my resume. It adds quite a bit to my days but in the long term, I believe education is always a good investment. Are there any classes you could take to flesh out your skills?

Anyhoo, since this week has been a blur, I thought I might do a little roundup of recent economic news …

On Wednesday, the Federal Reserve dropped its key interest rate, the federal funds rate by half a point, bring it to one percent. That probably won’t do much to regular mortgage rates but if you have a variable rate HELOC, you should see your rates drop. The reaction in the stock market was underwhelming, and will remain so until credit markets actually loosen  up - in other words, interest rates are somewhat irrelevant if nobody can get a loan. On the other hand, for entities who use very short term loan products or for existing variable rate loans, it’s helpful.

Ohio, Michigan, Kentucky, New York, Delaware and South Dakota have asked for bailout money for the automotive industry. Vehicle purchases are down significantly (see above), and automakers say that the industry is basically too big to fail because the industry directly and indirectly employs over five million Americans.

Financial firms at the heart of the derivatives and housing meltdown will still pay out nearly $20 billion in bonuses this year. According to Bloomberg,

Five straight quarters of losses and a 70 percent slide in its stock this year haven’t stopped Merrill Lynch & Co. from allocating about $6.7 billion to pay bonuses.

Goldman Sachs Group Inc. and Morgan Stanley, both still on track for profitable years, have set aside about $13 billion for bonuses after three quarters, down 28 percent from a year ago. Even some employees at Lehman Brothers Holdings Inc., which declared the biggest bankruptcy in U.S. history last month, will get the same bonus they received a year ago.

The bonuses will mostly go to top performers, with lower level employees taking large cuts, and the numbers are huge. Goldman Sachs had set aside an average of about $210,000 per employee. Since the receptionists and assistants aren’t going to get that, it means that the higher-ups are going to get bonuses in the millions. During the four years between 2003 and 2007, Goldman Sachs, Morgan Stanley, Merrill, Lehman Brothers and Bear Stearns paid out almost $140 billion in bonuses.

Alan Greenspan testified before Congress this week. He would like us all to know that it’s bothered him quite a bit that the financial industry did not behave the way he had hoped. It turns out that the financial industry didn’t have some big self-correcting mechanism that would kick in when things got out of balance. His belief in a free market with as little regulation as possible turned out not to produce an industry that would maintain sound practices in order to preserve shareholder equity, but a criminally predatory industry that rewarded its employees and left shareholders and taxpayers to clean up the mess.

Democrats are pushing for another stimulus package to the tune of $150 billion, and current Federal Reserve Chairman Ben Bernanke is all for it. He still won’t admit that the economy is in a recession, though, which seems to be an extraordinary display of denial. A stimulus would not probably be in the form of another rebate check but rather an investment in infrastructure projects that are both desperately needed and would provide jobs. Republicans are not excited about the idea and believe that making Bush’s tax cuts permanent is the better route to take because it would encourage investment. More of that self-correcting mechanism that would lead to the wealthy investing in bonds that would provide those infrastructure projects, no doubt, instead of investing in underpriced stocks and leaving that money essentially off the table for any kind of real growth.

Crude oil bounced around the $60 level and gas prices US fuel demand fell 7.8% compared to the same period a year ago. OPEC agreed to cut oil production by one and a half million barrels per day, and gasoline prices averaged $2.50 a gallon on October 30th, compared $3.58 per gallon just one month ago.

… And they say Obama’s a Marxist?

From Bloomberg on October 11th (yes, I’m behind again … so much to read, so little time):

Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.

From Merriam Webster:

so·cial·ism
Pronunciation:

\ˈsō-shə-ˌli-zəm\

Function:

noun

Date:

1837

1: any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods

What’s crazy is that this administration has found a bizarre combination of capitalism and socialism. If they follow this $40 billion a month plan for a full year, they’re going to spend one and a quarter TRILLION dollars to bail out a failed system that wanted to run basically on its own without any pesky regulation (oh sure, they have rules they’re supposed to follow but they also had lots of loopholes they stretched quite liberally), they’re going to let the crooks who caused the problem oversee the reconstruction, and at the same time, they’re going to take ownership via the loans of millions of homes.

You know, the whole point of this blog was that it was supposed to kinder and gentler, but seriously, the constant onslaught of insanity is making me a grumpy old woman.

I’m so tired of the bailout mess already, aren’t you?

So check this out. The Treasury is hiring people to manage the bailout - experts in the financial field, naturally. Applicants are supposed to inform the Treasury Department if they have any conflicts of interest that would compromise their ability to carry out their duties.

From the Associated Press via MSN Money, the Treasury Department is hiring for three essential types of positions:

• Management of mortgage securities once the government has purchased them.
• Management of loans.
• A “custodian” for the program to run auctions, handle accounting and attend to other duties.

All sensible. They’re not going to hire individuals, these would be functions that are contracted out to companies and paid for by you, Joe the American. The problem is, the companies that will inevitably be awarded these contracts are probably part of the problem in the first place. That, my dears, is a conflict of interest because it is almost impossible to believe that they would not have at least a desire to make sure their own assets are taken care of first.

The Treasury Department has a solution, though. They have said that any company that believes it might have a conflict of interest has to tell them and has to also write a nice essay on how they will make sure to not let it become a problem.

The law allows the department to offer contracts that are not governed by federal procurement regulations, but requires it to draw up conflict-of-interest guidelines.

Interim guidelines released last week require applicants to disclose “any actual or potential conflicts of interest” that may come into play. Applicants must submit a plan to show how they will “avoid, mitigate or neutralize” such conflicts.

“Not governed by federal procurement regulations” means unregulated awarding of contracts to companies who will get to spend $700 billion of your money. Chew on that while you consider that Henry Paulson used to be the CEO of Goldman Sachs.

Treasury says of course that they won’t only rely on the good word of the companies:

Department spokeswoman Jennifer Zuccarelli said the government will do more than simply require the companies to identify potential conflicts. “While we ask the firms to independently identify their conflicts, Treasury then independently identifies potential conflicts ourselves,” she said.

If you’re going to do that, why not put the whole process through regular channels?

The politicos weigh in:

“I am very concerned that they fail to meet the tough conflict-of-interest-standard directed by Congress in the legislation,” Pelosi said in an Oct. 7 letter to Treasury Secretary Henry Paulson. “Under these guidelines, companies that benefit from the Troubled Assets Relief Program may also be eligible to offer asset management or other contractor services if Treasury personnel approve a mitigation plan.”

The second-ranking House Republican, Rep. Roy Blunt of Missouri, said the bailout legislation rushed through Congress provides for much oversight and transparency. “Whatever the secretary does, the American people are going to get a chance to look at it,” he said in a television interview Sunday.

Pelosi raises a good point, and Blunt raises a ridiculous one. The American people may well get a chance to look at it, but will they understand what it says after it’s been legalized into oblivion?

In addition to the concern over conflicts, [Laura] Peterson [senior policy analyst for Taxpayers for Common Sense] said the government also has a generally poor track record when it comes to hiring private contractors quickly.

“There’s been lots of missteps in the past,” she said. “Iraq and Katrina are two very recent examples.”

Government auditors have issued a number of reports critical of contracting procedures during the Iraq war and in the aftermath of Hurricane Katrina.

I’m currently using my commute time to listen to an interesting book called The Shock Doctrine: The Rise of Disaster Capitalism. This whole bailout contracting article from MSN could be cut and pasted into that book and fit in just perfectly. I won’t go into a full review of the book, you can go to the link for that, but the upshot in this scenario and others that Naomi Klein recounts (with much bias against the Bush Administration, I should mention in the interest of disclosure) is … what sense, exactly, does it make to give a function to the federal government if they simply turn around and contract it back out to the private sector? Your tax dollars are going to fund, after a huge mismanagement of their assets in the first place, the contracting of the banking industry to “fix” the problem?

Can I SCREAM now?