You are currently browsing the daily archive for July 29, 2008.

I have to wonder whether the Fed’s current plan to prop up Fannie Mae and Freddie Mac is the Savings and Loan crisis from the 1980’s coming back for a reprise. Here we are with both Fannie Mae and Freddie Mac suffering huge loses. So huge that the Federal Reserve (along with both the Bush administration and Congress) wringing their hands over how to help the two mortgage giants remain alive so that their collapse will not trigger a financial system meltdown. But it’s not just Fannie Mae and Freddie Mac that the government is bailing out, there are other financial institutions that the government is offering to prop up and save at the cost of the tax payers. An interesting article on MSN Money by Bill Fleckenstein does an excellent job of summarizing how there seems to be very little outcry from the public at large for the government’s bailing out of these financial institutions which have pretty much brought our economy to a grinding halt. How did this happen? Pretty easily. While banks, typically, are supposed to be tightly regulated, a whole bunch of unregulated financial players entered the scene in the late 90s in early part of this decade. These players were not of a concern to Alan Greenspan, then chairman of the Federal Reserve Board. In his opinion, “the market would enforce disciplened risk-taking” (Krugman, Paul, “Another Temporary Fix“, The New York Times, July 28, 2008 ) As Paul Krugman notes in his op-ed in the New York Times:

Far from being disciplined in their risk-taking, lenders went wild. Concerns about the ability of borrowers to repay were waved aside; so were questions about whether soaring house prices made sense.

Lenders ignored the warning signs because they were part of a system built around the principle of heads I win, tails someone else loses. Mortgage originators didn’t worry about the solvency of borrowers, because they quickly sold off the loans they made, generally to investors who had no idea what they were buying. Throughout the financial industry, executives received huge bonuses when they seemed to be earning big profits, but didn’t have to give the money back when those profits turned into even bigger losses

(Krugman, Paul “Another Temporary Fix“, The New York Times, July 28, 2008 )

Well, those losses are now coming out more and more. Every day when we think that we’ve seen the worst and we’ve turned a corner we get another round of announcements by the financial institutions. Just last night, after the market closed, Merrill-Lynch announced another $6 billion (that’s a ‘b’, yes) in write-downs — i.e. losses that they’ll just have to take) Citigroup is indicating that it may announce another $8 billion in write-downs and two more banks have been taken over by the FDIC. How did all this happen? It’s quite complicated but James Grant of the Wall Street Journal does a good effort in trying to explain some of it in his article “Why no outrage?”

Why is there no outrage from the public that our government is doing all it can to bail out these financial institutions and very little to help the average homeowner? Perhaps because, as John McCain believes, the government feels that the homeowners got themselves into this mess as if the institutions bear no blame? That would be typical of this administration and this Congress. I’m not sure myself as to why there isn’t more of a public outcry. I’m of the opinion that these Wall Street institutions should bear more of their pain rather than put it onto the average tax payer. To me this sounds alot like the old Savings and Loan Crisis from the mid to late 80s. During the time period from 1986 to 1995 about 50% of all federally insured Savings and Loans were wiped out by…you guessed it…unsound real estate lending (Savings and Loan Crisis“, Wikipedia, July 21, 2008, http://en.wikipedia.org/wiki/Saving_and_Loans_Scandal) — sound familiar? And who got to foot the bill in the end? The taxpayer — to the tune of approximately $160 billion dollars and severe budget deficits and an economic recession in the early 90s. (Savings and Loan Crisis“, Wikipedia, July 21, 2008, http://en.wikipedia.org/wiki/Saving_and_Loans_Scandal) And the outlook from this mess doesn’t look any better. Thanks Wall Street.

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The NY Times today highlighted an article that focused on an internal DOJ investigation that identified aides to former attorney-general Alberto Gonzales who used political affiliation in their hiring and promotion process. They apparently picked less-qualified applicants for non-political positions over others because of their political affiliations or passed over better qualified applicants because of their or their spouse’s political affiliation or activities. The articles continues by detailing a few examples of such behavior.

A longtime prosecutor who drew rave reviews from his supervisors was passed over for an important counterterrorism slot because his wife was active in Democratic politics, and a much-less-experienced lawyer with Republican leanings got the job, the report said.

Another prosecutor was rejected for a job in part because she was thought to be a lesbian. And a Republican lawyer received high marks at his job interview because he was found to be sufficiently conservative on the core issues of “god, guns + gays.”

(Lichtblau, Eric,”Report Faults Aides in Hiring at Justice Dept.“,The New York Times, July 29, 2008 )

What, of course, is not surprising at all is that the report also determined that White House officials were also actively involved in these hirings and promotion decisions. Does this surprise me? Not in the least. The Bush administration has continually flaunted the legal limits on a wide variety of issues — be it wiretapping without warrants to the firing of U.S. attorneys because of political affiliations or leanings. The fact is this administration has made a rather severe mockery of the law by behaving, and encouraging the behavior, that it is above the law. Former Attorney General Gonzales should have kept better tabs on his department.

The [Department of Justice] report released on Monday goes much further in documenting pervasive evidence of political hiring for some of the department’s most senior career positions, including immigration judges, assistant United States attorneys and even senior counterterrorism positions.

The pattern appeared most damaging in the hiring of immigration judges, as vacancies were allowed to go unfilled — and a backlog of deportation cases grew — while Mr. Gonzales’s aides looked for conservative lawyers to fill what were supposed to be apolitical jobs.

(Lichtblau, Eric,”Report Faults Aides in Hiring at Justice Dept.“,The New York Times, July 29, 2008 )

Since these are apolitical positions within the Justice Department it is illegal according to Civil Service Law and contrary to the department’s own internal policies to use political affiliation as a benchmark for hiring and promotion decisions. Obviously Ms. Goodling and her predecessor, Susan Richmond, felt that they knew better than the law. An example of Ms. Richmond’s interference can be seen in the extension of an attorney’s appointment in the deputy attorney general’s office. When an aide in the deputy attorney general’s office inquired abount the delay he

summed up his frustration in an e-mail message recounting his inability to keep the lawyer in his office. “I also probed whether there is something negative about him that I did not know,” Mr. Levey wrote. “Turns out there is: he is a registered Democrat,” he wrote, and Jan Williams, an official in the White House, “thinks everyone in the leadership offices should have some demonstrated loyalty to the President. She all but said that he should pack his bags and get out of Dodge by sunset.”

(Lichtblau, Eric,”Report Faults Aides in Hiring at Justice Dept.“,The New York Times, July 29, 2008 )

Now, is this something endemic to just this White House? Probably not. But it is interesting to see how pervasive this behavior is in this administration. Sure there were scandals in the Clinton administration, some of them politically oriented and motivated. But this White House has taken this behavior to a new level. And it runs counter to the concept that President Bush is a “Uniter…not a divider” and of trying to portray himself and his administration as being principled. And of course the response from the White House to this report is as expected: Tony Fratto, a spokesman for the White House said of Monday’s report, “There really is not a lot new here.” (Lichtblau, Eric,”Report Faults Aides in Hiring at Justice Dept.“,The New York Times, July 29, 2008 )

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