Wall Street Bailout: Congressional Cover-Up, or Sarbanes-Oxley?

Every new controversy demands a look at similar situations of the past. Just what is a bailout anyway? In the early 80's, Lee Iacocca arranged a government loan and tax concessions to bring Chrysler Corporation back from the brink of bankruptcy -- during the Carter Administration, to save you a Google.

The economic domino effect of a major corporate death was clear, and Congress acted wisely when it saved this American icon from extinction--- the loans were repaid. But was it poor management or shortsighted government that caused the problem? Politicians massaged and empowered the labor unions, implemented minimum wage legislation, and protected the steel industry from foreign competition.

Similar financial problems existed throughout the automotive industry and lower cost, better product was just starting to come ashore. Bailout or fix-up? Voteless corporations were perfect patsies then, and remain so today. But the average Joe's investment in the success of these perennial scapegoats for bad government has risen from zero dollars to all of our dollars. Every failure takes a piece of your retirement program with it.

All employed John Q's are investors; all taxpayers are investors; all Americans have a vested equity interest in the success of all publicly traded corporations in our "regulated capitalism" economy. Most politicians still can't connect the dots, and seem to be formulating policy based on the latest consensus of public blogs.

It wasn't the financial institutions that decided to make mortgage money available to practically anyone who wanted to own a home--- regulators permitted (encouraged) a relaxation of the qualification requirements. In effect, they enabled the predatory lending practices that misguided many first time homebuyers.

The easy-money lending practices, and sky rocketing housing prices, brought speculators into the mix and home flipping became as popular as Monday Night Football. Speculators accept the risks of loss; it's what they do. But allowing the creation of high risk where none is expected is unacceptable. The creative products developed by the financial institutions must be examined more closely and labeled more effectively.

Speculative bubbles always implode--- this time taking down speculators and marginally qualified homebuyers alike. It's ever so easy to blame the corporations, but who called off the regulators? Brokerage Firms have entire divisions whose only job is to make sure that nobody looks cross-eyed at any SEC regulation (real, contemplated, or anticipated).

The SEC itself requires full disclosure from all registrants. The interests of the customer are always placed first--- except of course, as was the case with Collateralized Debt Obligations (CDOs), when an act of Congress prohibits the SEC from having a look. Could they have stemmed the tide? It doesn't matter. What matters is that complicated products are reviewed more carefully in the future.

Fannie Mae and Freddie Mac have a similar tale not to tell. Congress was closely involved in their charade as well, with conflicts of interest that are certainly worthy of extensive investigations, but, again, not now. Now we need to get this credit driven economy out of the emergency room and back out there where it belongs, greasing the wheels of all industries, growing jobs, and reaffirming the strengths of our system.

This is not a situation where an innocent government is bailing out an evil industry that has lost its credibility (the financial sector deserves little credibility). This is an opportunity for Congress to save and strengthen an economy that has suffered from a government-initiated relaxation of lending rules, a government-mandated ban on regulation of derivative products, and accounting rules that just don't make sense for mortgage backed (or any fixed income) securities.

Politically, using the financial institutions as a scapegoat is easy and, judging from Internet polls, effective. John Q is furious, but at only half of the problem causers, and for the wrong reasons. How many of you have stopped making your mortgage payments just because the market value of your home has fallen?

Less than 5% would be a fair estimate. Yet a much more significant amount of the collective mortgage debt in the USA (not in any stage of default) has been arbitrarily erased from institutional balance sheets. Even within the "toxic" products the government would purchase, 80% of the loans are solid and meeting their monthly commitments. The cash flow from these products is more than adequate to keep things moving, were it not for Sarbanes-Oxley.

Congress passed the Sarbanes-Oxley Act in 2002, placing some very stringent, inappropriate, and inflexible reporting rules on financial institutions. Under this law, financial assets must be valued at fair market value--- even if they are not for sale! The Working Capital Model eliminates this problem entirely, but it is difficult to apply when the individual securities are not identifiable.

More than 95% of Americans are making their mortgage payments right on schedule, yet there is no market for the financial products that contain these mortgages. Consequently, balance sheets reflect trillions of dollars less than the maturity value of the securities held by the financial institutions.

Eureka! Regulate the product-creating mechanism better, so that the productive value of the underlying assets is measurable. But, in the meantime, suspend the Sarbanes-Oxley restrictions and re-evaluate their applicability to packaged mortgage products in existence now.

Bonds, mortgages, preferred stocks, etc. are contracts that are honored 99% of the time. They are held for the income they promise. These promises are being met while the government tells holders that they can't be booked at full value. Have they all gone mad?

This is no bailout of an industry, it's a transfusion of capital needed to allow an industry to comply with legislation that just doesn't make sense. And while the politicians posture and pontificate, bluster and blame, banks are failing and irreparable harm is being done to John Q's nest egg. Yours and mine!

Telling me that my house has dropped in market value does me no harm, and I continue to make my monthly payments--- and the lower (more realistic) market value may reduce my carrying costs. Telling banks that the mortgages they are collecting on need to be written down because they can't be sold is lunacy.

Tell John Q more about the source of the problem, and different heads would roll.

Stock position: None.

Comments

[Jan VanDenB...:]

Disaggregate the MBSs. Disaggregate the bad bonds.

The individual Deeds of Trust or Mortgages inside these ugly wraps are 95% fine.

It is the packaging, slapped on by Wall Street, which is destroying the value of these DoTs, which are a type of bond.

All the bonds need to be aggregated by a government entity -- collected from everyone who has one in exchange for something of value to their capital and accounting -- and laws passed to disaggregate the MSBs to leave the underlying mortgages.

These Mortgages, or DoTs are highly marketable.

The individual, underlying Deeds of Trust (Mortgages) could be readily valued using standard DoT valuing software now used by thousands of DoT traders and investors. Thousands of these are sold every month.

95% of them would price out and sell just fine.

You're getting your monthly payment. You will continue to. Your rate of return is competitive with any other investment. There is no problem with this asset.

Some of the remaining 5% would have to be "worked out" with the owner/occupier, giving them a new loan on better terms, and some could be sold to private investors who would foreclose on the property and manage it. I don't see any reason why the government should ever have to actually own any real estate.

The key is to get back onto the ground where the individual mortgages -- 95% of which are FINE thank you -- and the houses are.

Wall Street has created a mess, building something they don't understand and which doesn't work.

Let's not package mortgages. They are too diverse and need closer management.

Jan VanDenBerg

2008 Sep 28 02:44 PM

[panocha man:]

who has been in power president ,and both houses of congress from 2001 to 2006? when this meltdown start ? mid 2006 i am in the industry day to day. how about meltdown in late 80s who was president through that bank melt down? bush , like father like son , who came out ahead last time?LET US VOTE FOR THE PARTY OF OUR GREATEST PRESIDENT :HERBERT HOOVER. if you don't blame BUSH/MCCAIN then you must still believe O J WAS INNOCENT AND THAT NICOLE COMMITTED SUICIDE . WHAT HAPPENED TO THE BUCK STOPS HERE.? NOT IN THE BUSH/REPUBLICAN VOCABULARY.




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2008 Sep 29 12:00 PM

[Jimbo:]

The culpability of several incumbent members of Congress for this mess is immense. These same jackasses are now piously bloviating about their patriotic deeds.

2008 Sep 29 12:04 PM

[Diegojames:]

where were the GOVERNMENT REGULATORS???? WHERE were the large HIGHLY PAID LEGAL DEPARTMENTS of these WALL STREET FIRMS?????
WHERE IS THE FBI NOW??? LETS ARREST AND PROSECUTE??? DID THE FBI GET LOBBYING MONEY just like CONGRESS from fannie and freddi(AKA slush funds for BRIBERY OF GOVERNMENT)

WRITE OR EMAIL CONGRESS EVERYDAY FOR ACTION.
DIEGOjames
NORTHRIDGE

2008 Sep 29 07:31 PM