700 Billion Rescue Plan Debated in Congress

First there was Enron. At the time the largest failure of a public company ever. The executives became greedy and gambled on the deregulated energy market and lost, big time. Many people lost jobs, stock investments and confidence in government to regulate energy markets and corporate board rooms. Did we learn anything from that mess?

During the same period corporate scandals grew to include well known companies like Tyco Int. and WorldCom. Congress passed legislation named after its co-sponsors Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH), which is affectionately known as SOX.

The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. We all expressed a sigh of relief and thought to ourselves, good thing that won’t happen again - we have the SEC watching the store, they’ll stop these thieves.

The worry and despair didn’t last long because the housing market was booming. Really roaring ahead and it seemed there was no end in sight to the height of the market. We sold our homes for huge profits and invested in two more hoping to flip fast for a quick profit. Mortgage brokers claimed they could get anyone qualified; poor credit, no credit - it didn’t matter. No money down, no doc loans became the norm and wow look at that low variable APR. Anyone can qualify we thought and why shouldn’t we. Everyone else is making a fortune. The bank says I qualify so I should take the money, right? Wrong! IndyMac Bank, with over $32 billion in assets, was the first notable bank to fail in July 2008. Dozens more followed as the Federal Deposit Insurance Agency becomes conservator to protect the deposits of customers. In all 29 banks have failed in 2008.

The market slowed and interest rates rose. Those attractive variable APR’s adjusted and millions got caught in a cash crunch including Countrywide. Bank of America rode to the rescue, but the market continued to sink and forclosures rose to unheard of levels. Mortgage companies laid off thousands and the free flowing financing dried up almost overnight. Who ever heard of mortgage backed securities? Banks would bundle mortgage loans and resell them to investors to create liquidity for more varaiable rate loans and quick profits from fees. The government agency charged with regulating all this activity fell asleep at the switch.

The Federal National Mortgage Association, commonly known as Fannie Mae, was a United States publicly traded government sponsored enterprise (GSE). It was a stockholder-owned corporation authorized to make loans and loan guarantees. Fannie Mae was the leading participant in the U.S. secondary mortgage market, which serves to provide liquidity to mortgage originators, to enable mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies have funds to lend to home buyers. As of 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) owned or guaranteed about half of the U.S.’s $12 trillion mortgage market.

In 1999, the Clinton administration, in a move to help increase home ownership rates among minorities and low-income consumers, encouraged the Fannie Mae Corporation to ease the credit requirements on loans that it will purchase from banks and other lenders. They encouraged those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

In an article during this time Steven Holmes of The New York Times wrote, “In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.” That’s exactly what happened and now the government has had to bailout Freddie and Fannie to the tune of $200 Billion.

In January the Bush administration along with Congressional leaders put together an economic stimulous plan of tax rebates to taxpayers. The rebates were expected to cost about $100 billion, and the package also included close to $50 billion in business tax cuts. The plan would give most tax filers refunds of $600 to $1,200. The rebate checks began arriving in May of this year. It apparently hasn’t stemmed the tide of the financial crisis. We can presume most Americans spent their checks, but has the economy been stimulated?

Now we’ve seen other financial and insurance giants toppled. From Bear Sterns to Merrill Lynch to Lehman Brothers, WaMu and AIG. The government has decided that AIG was worth saving and has invested $85 billion to restore solvency in the publicly traded corporation. A corporation the SEC is charged with regulating under SOX. There are intense and serious discussions lately of a $700 billion financial rescue plan to restore our economy and shore up weakened financial markets.

At the debates Friday night between Presidential candidates John McCain and Barack Obama there was discussion about the bailout plan and broad bipartisan support to act quickly. In the same breath there was clear condemnation of Congressional Earmarks or what some might call Pork Barrel spending. These are special appropriations directed at specific projects which are often attached to popular bills by legislators on behalf of their constituents or lobbyists. They both seem to agree that the $18 billion in earmarks is excessive.

So the question we’re left asking is who wins in all this mess. The taxpayers on Main Street or corporate fat cats on Wall Street? There are more questions than answers at this point, but one thing is clear. If we as Americans - Presidential candidates, Senators, Representatives and citizens alike don’t eliminate the greed, corrupting influences, selfish spending and irresponsibility in government and corporate America we’ll all be worse off than we were four years ago.