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Old 08-09-2008, 01:23 PM
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The credit crisis and a crumbling economy

Credit Crisis Triggers Unprecedented U.S. Response


By David Cho and Neil Irwin
Washington Post Staff Writers
Saturday, August 9, 2008; Page A01

Since the credit crisis erupted a year ago, the Bush administration has presided over one of the broadest expansions of the government into private lending in U.S. history, risking public money to prop up financial firms both large and small.

The administration has transformed federal agencies into dominant players in such diverse realms as student lending and mortgage finance while exposing itself to trillions of dollars in loans.

The scope of these commitments demonstrates the unprecedented nature of the challenge facing the nation. Not since the Great Depression have so many debt markets been in turmoil at the same time, financial historians say. During the savings and loan crisis of the late 1980s and early 1990s, for example, the financial upheaval was largely contained to banks and thrifts, though the real estate market also felt the impact

Now, the contagion has rapidly spread from mortgages to bonds and exotic securities, student and corporate lending, credit cards and home equity loans, and residential and commercial real estate. The disruption has buffeted investment and commercial banks, mortgage finance agencies, and insurance firms of different stripes.

"We have a banking crisis and an agency crisis and a mortgage crisis and a coming credit card crisis. We've never seen anything like that before. And it all seems to be coming home to roost at the same time. That's never happened either," said Charles Geisst, professor of finance at Manhattan College. He said the Great Depression was the last time financial markets were hammered by such a variety of factors. "But we did not even have credit cards in the 1930s; there were no such thing as student loans," he added.

The breadth and speed of events have sent federal officials scrambling to plug leaks in the financial system. In the process, the government has bound taxpayers to the fate of a wide variety of banks and borrowers and could ultimately be responsible for losses in the tens of billions of dollars or more, according to estimates by congressional reports and interviews with regulators.

But the government may also end up paying nothing at all, largely because it received collateral in return for backing much of these debts and could recoup some money if borrowers stop making their interest payments. No one knows for sure because much of the government's response involved novel programs designed to contain an unpredictable crisis.

As the credit crisis worsened, Treasury Secretary Henry M. Paulson Jr., a strong proponent of free markets and the architect of much of the administration's response, began to push initiatives that enlarged the government's involvement on Wall Street and in the housing industry.
"What I've said is that I'm playing the hand that was dealt and that my responsibility is to protect the U.S. economy and the American people," Paulson said in an interview.

The pace of these interventions accelerated as the credit crisis spread across the capital markets.

At first, the administration avoided programs that exposed taxpayers to potentially large losses. The Federal Housing Administration, for instance, offered struggling mortgage holders a chance to refinance into low-cost loans backed by the government with any losses borne by the agency's insurance fund. Last summer, Paulson also pressed private mortgage lenders to form an alliance called Hope Now to rework mortgages. The initiative did not require public funds, except to set up a hotline, and it may have prevented lawmakers at that time from pursuing more expensive initiatives, he said.

Within months, however, Paulson was directing more significant intrusions into the markets. In March, he strongly endorsed the Fed leaders' decision to put $29 billion in public money on the line to facilitate the takeover of the crippled investment firm Bear Stearns by Wall Street bank J.P. Morgan Chase.

In April, Paulson helped the Department of Education set up emergency programs to ensure students could get loans as private lenders fled the business because of trouble in the credit markets. Education officials ramped up their direct lending, which some analysts say could reach $75 billion, and got new authority from Congress to buy loans outright from lenders.

Then, last month, Paulson pushed for new authority to lend or invest in mortgage giants, Fannie Mae and Freddie Mac, which the Congressional Budget Office said could impose a wide range of costs to taxpayers, from nothing to more than $100 billion.

Along the way, the Fed was injecting money into the banking system, including through several new, unusual programs.

At times, Paulson acted by interpreting Treasury's powers broadly and encouraging other agencies he worked with to expand their authorities. In other cases, such as the rescue plan for Fannie Mae and Freddie Mac, he needed congressional approval.

That forced him to reluctantly accept a major Democratic proposal that authorized FHA to spend up to $300 billion to help homeowners who, because of falling prices, owe more than their homes are worth. The expected cost to taxpayers of this program is $1.7 billion, the Congressional Budget Office said. "There were parts of this legislation that just got passed that a number of us found objectionable, unnecessary, extraneous, too much government involvement," Paulson said.

Even helping the mortgage finance companies, was "an unpleasant task," he said. "But I found it a simple decision to do so because there was no other good alternative," he added.

Martin Neil Baily, who chaired the Council of Economic Advisers in the Clinton administration and now is at the Brookings Institution, said he found the administration's actions "very ironic."

"Paulson and his colleagues philosophically are free market people. But when things go wrong you just don't have a lot of choice," he said. "There has been a change in perception, that the government needs to play a more active role when we get into a financial crisis. . . . The question is to what degree do you say we won't do this again."

Paulson raised similar concerns in an interview. He warned that if the government always tries to bail out failing banks and companies, they will be motivated to take excessive risks. Others won't push themselves to succeed because they can rely on the government to bail them out.
Yet despite these convictions, Paulson said his hand was forced after the markets fell dangerously "out of balance" due to the credit crisis. Backing Fannie and Freddie, the country's two largest and most important financiers of mortgages, was the only way to keep the housing market from falling into turmoil, he said. Allowing Bear Stearns to fail could have led to a string of collapses at other huge Wall Street firms.

In negotiations over the Bear Stearns rescue, the Fed agreed to back $30 billion worth of risky mortgage assets but persuaded J.P. Morgan to absorb the first $1 billion of any losses. At the end of July, the portfolio was worth $29.1 billion, according to the central bank. Because the Fed can be patient and sell the assets gradually over time, officials believe taxpayers are highly unlikely to lose more than a couple billion dollars and the central bank may ultimately make some money.

The Fed has also made extensive efforts to inject cash into the financial system, and at the end of July had $167 billion in loans extended to banks. But those debts are unlikely to incur losses since the Fed requires borrowers to put up collateral.

Taxpayers face more risk from novel Fed initiatives to help investment banks weather the financial crisis. In one program, the Fed lets investment firms swap highly rated mortgage-backed securities for Treasury securities.

Meanwhile, the Education Department may end up taking on far more loans than it ever has in its history. Last year it issued $14 billion in federally guaranteed loans directly to students. It has the ability to double that capacity in the coming academic year, according to the officials, though outside analysts predict it may have lend out $35 billion or more with the help of contractors.

The department may also be forced to take over much of the market that consolidates federally guaranteed loans for post-graduates, according to Mark Kantrowitz of FinAid.org, a Web site that provides financial information for students. This $47.4 billion business allows borrowers to combine all of their student loans into one package with a single, relatively low rate.

Education Department Under Secretary Sara Martinez Tucker, who oversees higher education, said as early as April the department "began to get nervous" about whether enough loans would be available to students in the fall. Department officials met with President Bush on April 19. "We told him we think we need to have an intervention," she said. The president agreed.

Some programs are not expected to cost taxpayers significantly, regulators said. Since last summer, the initiative called FHA Secure has helped 290,000 homeowners who hold $46.8 billion of mortgages. But taxpayers won't have to bear the cost if these homeowners default, unless the agency's $18.6 billion insurance fund is depleted.

"It's a good example of what government should be doing," FHA Commissioner Brian Montgomery said.

from: http://www.washingtonpost.com/wp-dyn/content/article/2008/08/08/AR2008080803415_2.html?hpid=topnews&sid=ST2008080900527&pos=
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Old 08-09-2008, 03:24 PM
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That forced him to reluctantly accept a major Democratic proposal that authorized FHA to spend up to $300 billion to help homeowners who, because of falling prices, owe more than their homes are worth.
I don't like this one at all. Of course, I have a personal interest in seeing the housing market crash. If the prices go down a bit more, I can stop being a renter.
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Old 08-09-2008, 06:24 PM
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Do you miss Bill Clinton yet?

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Old 08-09-2008, 10:09 PM
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Nope. Much as I dislike Bush, I still think he's better than Slick Willie.

We could use a man like Herbert Hoover again.
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Old 08-09-2008, 11:25 PM
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I'm not to worried. If fuel prices come down a bit more you'll see consumer spending increase.

Another 18 months and this BS will be over.

Not to be a jerk but this entire year I have been predicting that oil would drop to $90-$100 a barrel, and its currantly $15 away from that.

So bah to all the people who think the world is ending.
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Old 08-10-2008, 02:03 AM
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I don't like this one at all. Of course, I have a personal interest in seeing the housing market crash. If the prices go down a bit more, I can stop being a renter.
The only thing that worries me with that scenario is that along with prices going down further may be a serious erosion of my ability to earn the funds I'd need to buy one of those now seemingly more affordable houses.
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Old 08-10-2008, 08:23 AM
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Originally Posted by Hatterasguy View Post
...but this entire year I have been predicting that oil would drop to $90-$100 a barrel, and its currantly $15 away from that...
...mainly because the dollar got stronger...if it goes south again, well....
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Old 08-10-2008, 09:03 AM
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Unemployment rate around here is 2%.

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Old 08-10-2008, 09:29 AM
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Originally Posted by Hatterasguy View Post
I'm not to worried. If fuel prices come down a bit more you'll see consumer spending increase.

Another 18 months and this BS will be over.

Not to be a jerk but this entire year I have been predicting that oil would drop to $90-$100 a barrel, and its currantly $15 away from that.

So bah to all the people who think the world is ending.
Yeah, brother! The oil is coming down, the dollar is going up, and the economy is currently fine although a bit nervous. The sky is NOT falling.

And a 2% joblessness rate means every bonehead who wants a job has one - including people who shouldn't have one.
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Old 08-10-2008, 09:44 AM
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Yeah, brother! The oil is coming down, the dollar is going up, and the economy is currently fine although a bit nervous. The sky is NOT falling.

And a 2% joblessness rate means every bonehead who wants a job has one - including people who shouldn't have one.
My place of work is training-ground for industry -- we simply cannot afford to compete. So we get college grads with no experience and pay them a bit better than entry level. They stay around a couple of years building experience, resume' and a solid work ethic. Then apply for a job with somebody who will pay them what they are worth. Bye-bye! Almost all of them stay in touch. Some of them come by or call sometimes head-hunting.

One fellow who worked for me back in the mid-1990's -- an excellent worker by any measure, is now a VP for the American division of a major international oilfield services company. I'll be the first to say that guy is an extreme exception. But OTOH, I only know of one guy whom we trained who has turned-out to be pretty-much a dud. To his current employer: I apologize! It was a fluke!

B

PS We have a very bright, hard-working, single young woman (who doesn't work for me) that is looking for adventure. She's got a MS in biology and has done field work in Hawaii and Micronesia as well as the swamps and bayous of Louisiana. Good with statistics. She's got good sense even though she's a natural risk-taker. A rare combination. I figure she'll be with us another year, at most.
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Old 08-10-2008, 04:00 PM
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Originally Posted by POS View Post
Yeah, brother! The oil is coming down, the dollar is going up, and the economy is currently fine although a bit nervous. The sky is NOT falling.

And a 2% joblessness rate means every bonehead who wants a job has one - including people who shouldn't have one.
Yep, thats why I'm not really worried about breaking ground on my spec house in October.
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Old 08-10-2008, 05:00 PM
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Originally Posted by Hatterasguy View Post
I'm not to worried. If fuel prices come down a bit more you'll see consumer spending increase.

Another 18 months and this BS will be over.

Not to be a jerk but this entire year I have been predicting that oil would drop to $90-$100 a barrel, and its currantly $15 away from that.

So bah to all the people who think the world is ending.
I don't think it's coincidence the dollar got stronger (bringing oil prices down) right after the bailout.
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Old 08-10-2008, 10:38 PM
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[QUOTE=Hatterasguy;1934871]Another 18 months and this BS will be over. QUOTE]

18 months for wall street or main street to turn around?
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Old 08-10-2008, 10:40 PM
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For the economy to post better growth numbers, and for their to be more loan options in regard to RE. Since that is mostly what I care about.

Our main street is doing quite well, actualy.
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Old 08-12-2008, 10:09 AM
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Originally Posted by Hatterasguy View Post
For the economy to post better growth numbers, and for their to be more loan options in regard to RE. Since that is mostly what I care about.

Our main street is doing quite well, actualy.
Hattie with all due respect where are you getting this "more loan options" thing, nothing can be farther from the truth

http://www.themortgagereports.com/

I urge everyone to read this blog inside and out, this guy knows his *****.
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