Tag Archives: bailouts

Economy

CA Lawmakers On The Bailout

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There are conflicting reports on a bipartisan deal on the Wall Street bailout, but I want to focus on a couple of our Democratic lawmakers who are doing a great job on this so far.

Brad Sherman, who has been a leading voice against the piece of crap Paulson plan, reports that phone calls are running 300 to 2 against the bailout.  His plan calls for a much smaller price tag, along with homeowner aid.  Sherman notes:

Interpreting the twisted political ways of Washington, Sherman said the plan is so unpopular that the only way it will pass is if Congress pushes it through this weekend — before members return to their districts and realize how hated the bailout is.

In addition, Pete Stark wrote one of the great Dear Colleague letters today, calling out the Treasury Secretary for his unnecessary fearmongering.  I’ll put it on the flip.

It is unacceptable for Democrats to carry this bill forward and be stuck with the political consequences.  It’s completely unclear whether or not it will work, and without serious changes it’s basically a gift to Wall Street executives with nothing for those who are struggling.  Keep the pressure on by letting your lawmakers know that they need to be showing leadership like Reps. Sherman and Stark.

…UPDATE: Asm. Ted Lieu has a good statement too, connecting this to the need for the Governor to sign AB 1830, the mortgage bill.  I’ll also put that on the flip.

Dear Colleague:

Many years ago, I was the Chief Executive Officer of a retail California bank, with assets approaching a billion dollars.  I feel compelled to comment on the part of our financial system upon which ninety percent of our business and individual constituents rely.

The independent community of savings banks and credit unions are safe, sound, and liquid.

Yes, they may be suffering from higher delinquencies due to local economic problems – unemployment, lower home prices, natural disasters, etc. – but that, for the majority, results in lower profits, slower growth, and higher credit standards for potential borrowers.

For those of us who believe in a market economy, those results should come as no surprise.  It should also come without question that the proposed bailout will only help reckless speculators who have been caught on the wrong side of the come line.

Yesterday, a colleague said that he was worried that banks had to pay close to six percent for “Fed funds” (day loans between banks, usually available at one to two percent, to adjust cash requirements.)  Well, dear colleague, Duh!  Whilst one bank paid six percent, another bank earned six percent.

Another colleague attributed to Secretary Paulson a comment to the effect that absent his bailout, folks wouldn’t be able to get cash at ATMs.  That is irresponsible rumor mongering hogwash.

Please, friends, whatever you decide about the “bailout,” (and I intend to ignore/oppose it in any of the forms suggested thus far) I ask you not to create fear and incite the public to unwarranted hysteria, which actually could hurt the economy.

Sincerely,

Pete Stark

Member of Congress

… here’s Ted Lieu’s statement:

For months now, California has been playing a leading role in finding solutions to the mortgage meltdown and credit crisis.  In the Assembly we know this is not a problem that happened overnight and we know that there won’t be any magic solutions that will happen overnight.  That is why my colleagues and I are urging that the Bush Administration’s Wall Street Bailout be done not just in a timely manner, but also done right.

Let’s set aside for now the chutzpah of Treasury Secretary Hank Paulson for demanding the largest taxpayer bailout in the history of the free world, demanding that he should get unfettered discretion to spend this largesse, and demanding that all of this be done in less than a week.  The question we should ask is, why should we trust him?  Secretary Paulson saw this crisis coming, it is on his watch, and he has repeatedly failed to act in a timely manner.  Remember Paulson’s “Hope Now” solution to prevent foreclosures that he hyped at the beginning of this year?  I, consumer groups, and countless others repeatedly warned that Secretary Paulson’s plan did virtually nothing to resolve the problem of unsustainable lending and uncontrolled foreclosures.  He proceeded with window dressing when fundamental reform was needed.

Secretary Paulson is now demanding that his last-minute bailout plan be jammed through in less than one week with no conditions.  There is no logical reason why the bailout plan cannot both be done in a timely manner and include fundamental and much needed reforms, such as banning the predatory practices that led to this crisis, fixing executive compensation, and helping homeowners facing foreclosure.

The nation’s financial crisis has many moving parts and every level of government has a role to play.  For our part, the California legislature recently took a leadership role in developing solutions to this crisis by passing AB 1830 on a bipartisan basis to reform predatory practices and products in California’s mortgage industry.  I call on Governor Schwarzenegger to demonstrate leadership on the issue and sign AB 1830.  Maybe he can also send a copy to his friends in the Bush Administration. Language similar to AB 1830, incorporated into the Wall Street bailout plan, would greatly improve the plan.  

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Pass AB1830 To Help Fix The Financial Crisis

The big story today continues to be the Bush/Paulson bailout bill, which is now being debated on Capitol Hill.  In calling my representatives yesterday, Rep. Waxman seemed very wary of giving away $700 billion dollars to the Treasury Dept. without oversight or judicial review.  Sen. Boxer’s statement still buys into the “need for speed” that is accelerating this legislation in an effort to sneak through something very bad, but she does hit the real genesis of the crisis.

In addition, we must get to the root of the housing crisis and work to keep people in their homes through refinancing; if we don’t, housing prices will continue to freefall and we will still be in a mess.

In California, we have more foreclosures than any other state-in August more than 101,000 Californians received foreclosure notices and more than 33,000 lost their homes.

If the American taxpayers come to the rescue in this financial crisis, you have to provide assurances that they aren’t just taking on bad debt and further jeopardizing their future.

The housing crisis is the first mover here.  Lenders and financial industry actors had an extreme need to get people into mortgages, no matter their income or ability to pay, and they sweet-talked them into teaser rates and ARMs with no money down and low opening monthly payments.  The idea was to accumulate as many mortgages as possible to package them into mortgage-backed securities to sell overseas.  It was a bad bet predicated on perpetual growth in the housing market, and when it crashed there was no flight to safety.  

The most important protection for taxpayers comes with protection from the types of lending schemes we saw in the housing market, and that starts not just on Wall Street, but in the states.  Aggressive regulation of the housing market in California will go very far to protect against such a crisis from happening again.  The legislature passed AB1830 to address exactly this issue, and today Asm. Ted Lieu, the author of the bill, writes Governor Schwarzenegger urging him to sign it.

As you have said in advocating for budget reform, “Enough is enough!” Similarly, the past few years have shown the consequences of a system that failed to effectively regulate and reign in the out of control subprime mortgage industry. The laissez-faire policies previously advocated by much of the industry have turned out to be disastrous. As with budget reform, we need effective mortgage reforne. “Enough is enough!”

To much of the industry’s credit, many within the industry and Wall Street recognize that they need better regulation. That is why the following major industry institutions (collectively representing thousands of financial institutions) have all gone neutral on this bill and many of them have contacted your office asking you to sign this bill: The California Bankers Association, California Mortgage Bankers Association, California Independent Bankers, California Credit Union League, and the California Financial Services Association […]

AB 1830 provides consumer protections for subprime loans while maintaining access to credit and homeownership. This carefully crafted bill is the product of dozens and dozens of meetings and discussions with industry and consumer groups over an eight month period. Through our efforts to craft a balanced approach the leading organizations in the financial and banking industry have gone neutral on this bill. Although a minority of groups still oppose, such as the mortgage brokers and realtors, we have taken several of their suggestions and have worked hard to try to accommodate their concerns.

AB1830 would put mortgage brokers themselves on the hook for their predatory practices, imparting to them a fiduciary duty which would subject them to potential civil suits and loss of license were they not to put the economic interest of the borrower first.  It would end the practice of yield spread premiums, which actually financially incentivized brokers to put borrowers into riskier and more costly mortgage options.  It would prohibit steering prime borrowers into subprime loans, a common practice.  It would ban “negative amortization” loans that would cost the borrower more for the loan even after their initial payments.  It would increase enforcements, put caps on prepayment penalties, and go very far to prevent the kinds of abuses that led to this crisis in the credit markets.

It’s essential to the future of your stock portfolio as well as the future of the state’s economic picture to pass AB1830.  The Governor should do so as soon as possible.

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CA-27: Brad Sherman (!) Leads House Revolt Against President Paulson Bailout

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This is unexpected but welcome:

Democratic MEMBERS Meeting on Bailout Plan, TODAY, Room 2220, 2:30-3:30pm

From: The Honorable Brad Sherman

Date: 9/22/2008

Skeptical About the

Administration’s $700 Billion Bailout Plan?

Democratic Members Meeting

Room 2220

2:30-3:30 P.M.

Dear Democratic Colleague:

Are you skeptical about the $700 billion bailout bill?  Let’s meet in Room 2220 on Monday, September 22, 2008 at 2:30 PM.  Come to the first and perhaps only meeting of the Skeptics Caucus to discuss President Bush’s $700 billion bailout bill.  Democratic Members and Senior Staff only.

Bring specific legislative proposals.  I will be bringing legislative proposals to carry out the principles set forth in the letter below.  If you have questions about this meeting, please contact me or my Legislative Director and Counsel, Gary Goldberg, at xyz.

Sincerely,

Brad Sherman

Member of Congress

I would expect this out of a Barbara Lee or Maxine Waters, but coming from Sherman, this means that rank and file Democrats are very wary of getting steamrolled by the Bush Administration and let a major chunk of the Federal treasury flow out of their control.  Sherman is pretty middle-of-the-road as Democrats go, squarely in the mainstream of the party if not to the right of the mainstream, not a guy who’s out in front a lot and not (to my knowledge) a member of the Progressive Caucus.  I’ve met him a couple times out here in California and he seemed OK, but not exactly the guy I’d expect to go to war with.  If Sherman is marching (pardon the pun), there’s a very large skeptic’s caucus, I’d gather.  And Sherman’s prescriptions for a better bill (available at the link) are really good.

In the Quick Hits, I mentioned Debbie Cook’s statement from earlier:

“We must take action to keep our whole economy from collapsing. But if the plan by the Treasury which has leaked out today is genuine, then it’s unclear if the plan will work at all.

“Add in a massive transfer of authority to the executive branch, with no congressional oversight or judicial review, and this plan should be dead on arrival.

“Handing over taxpayer money to the government with no oversight is always a bad idea and it’s especially rotten given the current administration’s track record.”

And Rep. Hilda Solis, traveling with netroots favorite Annette Taddeo in South Florida, released a great statement as well, connecting this fiscal crisis to the effort to privatize Social Security:

“Three years ago, President Bush and rubberstamps in Congress like Ileana Ros-Lehtinen fought hard to privatize Social Security. From the floor of Congress, Ros-Lehtinen said that she “applauded the President for his strong leadership and vision” and that she wanted to “reform Social Security to include private accounts. Had George W. Bush and rubberstamps in Congress had their way, today’s financial crisis would be a full-blown emergency. Tens of millions of seniors around the country, including hundreds of thousands here in South Florida, would have lost their pensions overnight.”

It’s time for an “all-hands-on-deck” approach.  Call your Representatives and tell them you don’t want to give a blank check for $700 billion dollars to the guys who messed up Iraq and the response to Hurricane Katrina.

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California Cities Going Under, No Bear-Sterns Style Bailout in Store

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I posted yesterday about the painful irony of the Fed bailing out egregious greedheads Bear Sterns but refusing to lift a finger to help the majority of states that are falling into the red.

Edit by Brian: Look over the flip.

And its not just Vallejo, now its Los Angeles too:

Facing a tough financial year, officials proposed a reduced $21.9 billion Los Angeles County budget that may yet take hits from potential state and federal cuts, while Mayor Antonio Villaraigosa proposed a $7 billion city budget that calls for employee layoffs and higher service fees.


Villaraigosa’s 2008-09 spending plan comes as the nation’s second-largest city faces a projected $406 million shortfall.


The plan calls for eliminating 767 city jobs and mandating “short-term layoffs” that could force employees to take several unpaid vacation days.


The difference between a private entity like Bear Sterns and a public one like LA or Vallejo, or California which is facing an enormous deficit of its own, is that public entities do more than employ a lot of people. They also provide essential services to children, the elderly and the ill.


The Center on Budget Policies and Priorities outlines some potential solutions.

Federal assistance can lessen the extent to which states take pro-cyclical actions that can further harm the economy.  In the recession in the early part of this decade, the federal government provided $20 billion in fiscal relief in a package enacted in 2003.  There were two types of assistance to states: 1) a temporary increase in the federal share of the Medicaid program; and 2) general grants to states, based on population.  Each part was for $10 billion.  The increased Medicaid match averted even deeper cuts in public health insurance than actually occurred, while the general grants helped prevent cuts in a wide variety of other critical services.  The major problem with that assistance was that it was enacted many months after the beginning of the recession, so it was less effective than it could have been in preventing state actions that deepened the economic downturn.  The federal government should consider aiding states earlier, rather than waiting until the downturn is nearly over.

The thing is, we’ll have to rely on our Democratic congress taking effective action. I think we can, I think we can…

Meanwhile, global food shortages are now hitting California stores:

Rice is a popular dish in many Bay Area homes, but now there’s a shortage that is making the cost of the staple unstable.

The cost of a 50-pound sack of jasmine rice has soared to $21.99. There have been so many buyers flocking a Costco in Mountain View that two other brands of rice were completely sold out Monday.

How bad will it get before our Democratic Congress takes effective action?

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If Bear Stearns is too big to fail, what about the states?

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Last month the Federal Reserve stepped in with $30 billion in tax payer money to bail out the failing Bear Sterns investment bank. The argument was that Bear Stearns was “too big to fail.”

As part of the deal, J.P. Morgan Chase, a major Wall Street bank, will buy Bear Stearns for a bargain-basement price, paying $2 a share for an institution that still plays a central role in executing financial transactions. Bear Stearns stock closed at $57 on Thursday and $30 on Friday. J.P. Morgan was unwilling to assume the risk of many of Bear Stearns’s mortgage and other complicated assets, so the Federal Reserve agreed to take on the risk of about $30 billion worth of those investments.

The Fed “is working to promote liquid, well-functioning financial markets, which are essential for economic growth,” Chairman Ben S. Bernanke said in a conference call with reporters last night. Treasury Secretary Henry M. Paulson Jr., who was deeply involved in the talks though not a formal party to them, indicated support for the actions.

The Fed’s moves were meant to reverse a rising tide of panic that has buffeted Wall Street as banks and other institutions have found it increasingly difficult to get credit.

This report from the Center on Budget & Policy Priorities shows that the states are now being hit hard by the same hard economic times that dropped Bear Stearns:

At least twenty-seven states, including several of the nation’s largest, face budget shortfalls in fiscal year 2009. Of these 27 states, specific estimates are available for 22 states and the District of Columbia; the combined deficits of these 22 states plus the District of Columbia are expected to total at least $39 billion for fiscal 2009 — which begins July 2008 in most states. Another 3 states expect budget problems in fiscal year 2010, although some of those gaps may occur earlier than expected.


…

The 22 states in which revenues are expected to fall short of the amount needed to support current services in fiscal year 2009 are Alabama, Arizona, California, Florida, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin. In addition, the District of Columbia is expecting a shortfall in fiscal year 2009. The budget gaps total $39.1 to $40.8 billion, averaging 8.9 – 9.3 percent of these states’ general fund budgets.

Two things jump out at me:

  1. The amount of U.S. taxpayer money risked to bailout Bear Sterns — $30 billion — is almost as much as what it would take to bail out the 22 states that are experiencing shortfalls this year.
  2. Bear Sterns is considered “too big to fail” because its failing threatens other big Wall Street entities. The 22 states who are sinking under mountains of debt will have to cut their spending and that will hurt millions of Americans.


As the Center on Budget & Policy report points out, those consequences will be severe:

In states facing budget gaps, the consequences could be severe — for residents as well as the economy.  Unlike the federal government, states cannot run deficits when the economy turns down; they must cut expenditures, raise taxes, or draw down reserve funds to balance their budgets.  Even if the economy does not fall into a recession as it did in the earlier part of this decade, actions will have to be taken to close the budget gaps states are now identifying.  The experience of the last recession is instructive as to what kinds of actions states may take.

  • Cuts in services like health and education.  In the last recession, some 34 states cut eligibility for public health programs, causing well over 1 million people to lose health coverage, and at least 23 states cut eligibility for child care subsidies or otherwise limited access to child care.  In addition, 34 states cut real per-pupil aid to school districts for K-12 education between 2002 and 2004, resulting in higher fees for textbooks and courses, shorter school days, fewer personnel, and reduced transportation.
  • Tax increases. Tax increases may be needed to prevent the types of service cuts described above. However, the taxes states often raise during economic downturns are regressive — that is, they fall most heavily on lower-income residents.
  • Cuts in local services or increases in local taxes. While the property tax is usually the most stable revenue source during an economic downturn, that is not the case now. If property tax revenues decline because of the bursting of the housing bubble, localities and schools will either have to get more aid from the state — a difficult proposition when states themselves are running deficits — or reduce expenditures on schools, public safety, and other services.

There’s a lot more detail on consequences of letting a majority of our states go into budget shortfall here.