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Economic News: Politicians Fight Over Last Bailout

January 10, 2009

paulson-bailout-fever-2U.S. Treasury Secretary, Henry Paulson pulled out of buying troubled mortgage assets two months ago because he decided that the premise wasn’t viable. All this after emergency legislation was drafted because the Bush administration insisted that the economy was about to melt down in short order. To compound matters, the oversight that was ordered to take place by Congress didn’t happen, resulting in complete confusion as to what was accomplished by the first installment of EESA through the TARP government program last year. Where the money was actually spent has become an accountability issue, an embarrassment that politicians don’t want to address. In a maverick move, Paulson decided to pull out and find other ways to bolster the U.S. economy as a stunned Congress sat on the sidelines.

Yet, no one is admitting what happened to the first installment of EESA through TARP, engineered by Congress as emergency legislation. In essence, $350 billion is unaccounted for without apology. What does Congress say?

abc-news-cuomo-frank-bailout-interviewIn an ABC interview, Christopher Cuomo interviewed the Chairman of the Financial Services Committee, clearly giving Chairman Barney Frank the respect and deference that his high position holds, while attempting to hold Frank responsible for his position. Frank’s immediate response was to dismiss the huge expenditures in light of the Bush administration’s expenditures for the Iraq War. Frank sees the bailout as separated, the first bailout for the credit crisis because of unwise investments, followed by a consumer crisis. When pressed about the importance of personal accountability as Finance Committee Chairman, Frank grew increasingly irate. Frank’s response was a hasty, “no…we don’t need it,” when referring to accountability.

“We set up a mechanism to monitor it and because we are unhappy with it, we have frozen the second half of it,” remarked Frank. Frank maintains that the Bush administration spent the first $350 billion differently than they told Congress. Frank maintains that Congress expected Paulson and the administration to spend on diminishing foreclosure levels. The ABC interviewer rightly asked why taxpaying Americans weren’t assisted first. Frank insisted that Congress designed the legislation to help with foreclosures, but that the Bush administration had the initiative, refusing to provide capital for mortgage foreclosures. Frank insists that even though the Bush administration was given the power needed, through discretion allowed by law, they failed to follow through. The interviewer implied that Congress and Frank were powerless to deal effectively with the handling of taxpayer funds, a distortion as far as Barney Frank is concerned. “Congress cannot directly administer government programs under the Constitution…The administration has defied Congressional authority in a number of cases.”

bailout-freePaulson claims that capital infusions have stabilized the financial sector. U.S. banks still hold hundreds of billions of dollars of mortgage-backed securities that could continue to lose value, resulting in more write-offs. Many want the U.S. Treasury to return to the design of the original bailout to move toxic assets off banks’ balance sheets. Removing the toxic assets from circulation is held as essential to securing the U.S. economic financial system.

Transparency and lack of organization due of technological lack seems to remain the largest obstacles to removing toxic assets from the banking community. Reading between the lines, Paulson and staff were so frustrated in trying to find and separate the complex financial derivatives, they decided that the premise of the bailout was faulty. So who is right? Are the bankers right in assuming that they have not designed the perfect killer banking instruments, so complex that they cannot be unraveled and fully discovered or is Paulson and his hired staff right in the belief that deconstructing the basis of the banking crisis is unviable, perhaps impossible. Everyone is crying that the bad assets, spawned by nothing less than greed and incompetence, are not going away and threaten the ability of the nation to resolve the current recession.

Who is really right? Americans deserve the correct answer from their elected officials, not panic or pap. Our elected officials don’t appear to be wrapped very tight where money or accountability are concerned. The political and governmental system protects them from their own incompentence or inability. While Osama bin Laden has plotted his designs of terror, the real terrorists continue to reside within the banking and financial  system, wolves wearing the clothing of sheep. ~ E. Manning

One Comment leave one →
  1. Prof. Samuel D. Bornstein permalink
    January 11, 2009 11:40 am

    Rep. Barney Frank is passionate about setting aside $50 Billion for Foreclosure Relief. I would like to alert Rep. Frank that Congress should focus on a group who is especially vulnerable to Foreclosure and whose failure will result not only in loss of home, but also result in millions of lost jobs. I am referring to the millions of Self-Employed Small Business owners who are at-risk of default, foreclosure, and business failure.

    A recent national survey determined the extent of involvement of this segment of the small business community in the risky “Toxic” mortgages that are expected to “reset” in 2009, thereby resulting in the 2nd “Tsunami” Wave of Foreclosures that will dwarf the Subprime Mortgage Crisis.

    On December 14, 2008, CBS’s “60 Minutes” had a segment on the 2nd Wave of Foreclosures. CBS indicated that experts were expecting another wave of mortgage defaults on ALT-A and Option ARMs mortgages which will dwarf the Subprime Mortgage Crisis. CBS MISSED A VERY IMPORTANT FACT!

    Many fail to realize that there are millions of self-employed smaller businesses that are holding these “toxic” mortgages that are going to reset in 2009 through 2012. These borrowers are Prime and Near-Prime borrowers who hold ALT-A, Option ARMs, Interest-Only mortgages. There are $1 Trillion ALT-As, and $500-600 Billion Option ARMs.

    So, here we have a major problem. Not only will these small business owners lose their homes, but there will be the resulting JOB LOSSES on their business failure. Although President-Elect Obama is stressing the need to create 3 million new jobs, we must understand that JOB RETENTION IS AS IMPORTANT AS JOB CREATION.

    I authored a survey which was conducted by the National Association for the Self-Employed (NASE) to its national membership. The NASE survey is at

    See the NASE News for the Survey on Toxic Mortgages. Please read my Commentary.

    According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other “toxic” mortgages. Of this number, 3 million are “very worried” about their ability to make the monthly payment due at “reset” , and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.

    The solution lies in the hands of Congress as they meet in January to structure an Economic Stimulus package. Congress should take note of this survey and be “proactive” in addressing the situation, rather than “reactive” as the case has been in the Subprime Mortgage Crisis.

    It is a tragedy when an individual borrower defaults on the mortgage and loses his/her home. The tragedy is magnified when the borrower is a small business owner, employing from 1 to 10 employees. The loss of jobs related to mortgage defaults and the resulting business failures will further weaken our economy and prolong the recession.

    We can’t afford another shock to our economic system at this time. This 2nd Wave of Foreclosures which will be caused by the ALT-A and Option ARMs will not only result in Foreclosures, but also Job Loss.

    I would appreciate if you would bring this info to light in Washington.

    Thank you,

    Samuel D. Bornstein
    Professor of Accounting & Taxation
    Kean University, School of Business, Union, NJ
    Tel: (732) 493 – 4799

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