Stocks Tumble 778 Points As Bailout Plan Fails

I am no fan of bailing out those who made bad business decisions, particularly when the top decision makers drew salaries and bonuses that border on the obscene and unconscionable. Nonetheless, allowing the economy to crash and burn is not a good idea either. A further irony, of course, is that it is the Republican Party in Congress and the Chimperator's White House, including John McSenile, who set the stage for the current debacle by seeking to strip away all regulation and oversight that might have constrained the greedy on Wall Street and also imposed some rationality standard to mortgage credit underwriting. Now, the very same politicians - other than the Chimperator who doesn't want yet another fiasco to happen on his watch - who allowed the crisis to come about are the ones who do not want to take responsibility and try to clean up the mess. Yes, Pelosi made a speech placing blame on the Chimperator and the GOP, but it was directly on target. They need to be held accountable. Here are highlights from the Huffington Post:

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In an extraordinary gamble on the future of the global economy, the House of Representatives voted down the $700 illion Wall Street bill 205-228, as Republicans defied their president, their presidential nominee and the congressional leadership to vote nearly two to one against the measure described as crucial to the prevention of an economic collapse.

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While the economic consequences of the vote will be determined during the coming weeks, the outcome this afternoon was a major setback to John McCain, who had backed the proposal and portrayed himself as a party leader who would help win approval for the bailout. . . . Instead, members of McCain's own party voted 133 to 65 against the measure. Democrats, on the other hand, voted 140 to 95 for the bill.

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In an attempt to shift blame for the defeat, House Republican Leader John Boehner of Ohio and Republican Whip Roy Blunt of Missouri charged that House Speaker Nancy Pelosi provoked the 'no' votes by angering Republican members with an excessively partisan floor speech. . . . In her speech, Pelosi did place some of the blame for the current crisis on Bush: "Today, we will act to avert this crisis, but informed by our experience of the past eight years with the failed economic leadership that has left us left incapable of meeting the challenges of the future.

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There very likely will be an attempt to try to pass the bill again, although it is not clear how soon that would take place. Republican Congressman Joe Barton of Texas asked if he could move for reconsideration and if he did, how soon would it be taken up. He was told by House parliamentarians that it would be taken up immediately -- too soon for supporters to regroup -- so he put off his motion.

An Inadequate Case for the Bailout

For over a year I have discussed the collapse of the U.S. real estate market and the havoc that I believed it would cause to the larger economy. Sadly, most in Washington paid little or no attention to the problem until it became a catastrophe. Now the Chimperator's crew have proposed a huge bailout which has as its main features (1) no accountability on the part of the Secretary of the Treasury, (2) no punishment for those in the investment banking and mortgage industries who recklessly caused the mess, and (3) no help for the average homeowner or business owner who has been swept up into the maelstrom. Moreover, the $2.5 billion in the bonus pool for Lehman Brothers, now in bankruptcy, and golden parchutes of CEO's of failed firms, are nothing short of obscene. The New York Times has a good editorial that lays out why the current administration proposal does not fit the bill for what is needed. Here are some highlights:

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Under skeptical questioning in the Senate Banking Committee on Tuesday, Treasury Secretary Henry Paulson and the Federal Reserve chairman, Ben Bernanke, gave no ground in defense of their $700 billion proposal to bail out the financial system. They also gave little reason to believe that their proposal would protect taxpayers from huge losses.

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Rather than rushing to approve the $700 billion bailout, lawmakers need to examine alternatives. They should look for one that ideally would let taxpayers share in the gains from any postbailout revival, along with the bankers and private investors who will make money if the bailout succeeds. Several ideas have been advanced that Congress should examine.

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Prominent among them is a plan to make a direct investment of taxpayer dollars into financial firms, rather than buying up their bad assets. With that money, the firms could absorb the losses that they are bound to take as their investments go sour and avert failure and panic. Once the firms begin to recover, taxpayers would earn a return.

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Another proposal, advanced by Senator Christopher Dodd, would buy up bad assets, as proposed by the administration, but would give the government the option to acquire stock in the firms receiving help. The danger is that private investors, fearful of seeing their ownership stakes diluted if the government becomes a shareholder, might be reluctant to invest money. That would deprive the firms of investments they need to recover.

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One thing is certain. If taxpayers do not share in the potential profits from a bailout, someone else will. On Tuesday, the Federal Reserve announced that it was relaxing rules that require investors who take large stakes in banks to submit to longstanding regulations on transparency and managerial control. Private equity firms have pushed for the changes because they would like to become big investors in beaten-down banks but do not want to be regulated.

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Relaxing the rules invites more of the same type of opacity and risk-taking into banking that caused many of today’s financial problems. Politically, the Fed’s timing could not have been worse. Taxpayers are being asked to buy up banks’ junky assets, with little expectation of return. At the same time, private equity firms are being invited to make what are likely to be highly profitable investments in the same banks. That’s not a plan that lawmakers and voters can support. Congress has more work to do.

Fannie Mae/Freddie Mac Paid McCain Adviser Nearly $2 Million

John McSenile is trying to jump on the change band wagon but the reality is that little has changed with him since the savings and loan debacle days. He and his advisers are still tightly in bed with those that should be regulated to avoid the worse outgrowths of greed and desire to make a quick buck. Now it turns out that one of McCain's advisers received nearly $2 million from the recently nationalized Fannie Mae and Freddie Mac to defend them against stricter regulations, current and former officials say. Had some of those regulations been enacted, perhaps some of the ongoing financial melt down - which will ultimately be paid for by taxpayers - might have been avoided. Oh, and while I an on the subject, do NOT be deceived by those in the GOP who may try to shift blame to the Democrat controlled Congress. As one who has worked in the trenches of the real estate industry, the vast majority of the bad loans now exploding everywhere were made BEFORE the Democrats regained control of Congress in January 2007. This is a REPUBLICAN sponsored fiasco and the GOP needs to have it hung around the party's neck. Here are some highlights from the New York Times:

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Senator John McCain’s campaign manager was paid more than $30,000 a month for five years as president of an advocacy group set up by the mortgage giants Fannie Mae and Freddie Mac to defend them against stricter regulations, current and former officials say. . . . . [L]ast week the McCain campaign stepped up a running battle of guilt by association when it began broadcasting commercials trying to link Mr. Obama directly to the government bailout of the mortgage giants this month. . . .

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Incensed by the advertisements, several current and former executives of the companies came forward to discuss the role that Rick Davis, Mr. McCain’s campaign manager and longtime adviser, played in helping Fannie Mae and Freddie Mac beat back regulatory challenges when he served as president of their advocacy group, the Homeownership Alliance, formed in the summer of 2000.

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“The value that he brought to the relationship was the closeness to Senator McCain and the possibility that Senator McCain was going to run for president again,” said Robert McCarson, a former spokesman for Fannie Mae, who said that while he worked there from 2000 to 2002, Fannie Mae and Freddie Mac together paid Mr. Davis’s firm $35,000 a month. Mr. Davis “didn’t really do anything,” Mr. McCarson, a Democrat, said.

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“They were financed largely, possibly exclusively, by Fannie and Freddie,” said William R. Maloni, a Democrat who is a former head of industry relations for Fannie Mae. “We thought it would be helpful to have someone who was a broadly recognized Republican to be the face of the organization, and that person became Rick Davis.” Mr. Maloni added, “Rick, for that purpose, turned out to be quite good.”

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The federal bailout of the two mortgage giants has become an emblem of what critics say is the outdated or inadequate regulatory system that allowed the financial system to slide into crisis this summer.