Paulson's Breathtaking Power Grab

By Alan White

The New York Times has posted a draft of the bill Treasury Secretary Paulson wants Congress to pass next week, handing over the Constitutional appropriation power to him, to the tune of $700 billion. The bill would allow Paulson to purchase any mortgage-related assets (mortgages, securities, real estate) with only two objectives in mind: financial stability and protecting taxpayers. Notably absent from the considerations (which are not enforceable by Congress or the Courts in any case) is protecting homeowners from foreclosure.

The problems with this are too numerous to catalog. While making loans and accepting questionable mortgage assets as collateral is one thing, buying the assets is something else entirely. Treasury bureaucrats will be deciding once and for all how much of a loss (if any: perhaps we'll pay 100 cents on the dollar) investors must absorb. The rest will fall on the taxpayer.

True, the one-step-at-a-time method used in prior weeks may not have satisfied Wall Street, but this new approach is little more than capitulating to Wall Street extortion. If there is a run on money market accounts, by all means provide some (temporary) deposit insurance. If there is a major bank or insurance company going under, by all means arrange an orderly takeover of its assets and back up essential obligations.

Taxpayers bailed out all the savings and loans depositors because we had no choice - their deposits were insured by law. The investors in CDOs and CDOs squared are not entitled to a bailout, and we should not empower the Treasury to provide them with one. Congress should insist that Treasury come back with a more measured approach focusing on the immediate needs of American consumers and businesses, hedge funds excepted.

Bush Administration Seeks Bailout of U.S. Financial Markets

by Brian Wolfman

The Washington Post strikes again, with more than a dozen articles today on the U.S. financial crisis and the Bush Administration's non-laissez faire approach to fixing it. To give you a flavor, the lead article, entitled "Historic Market Bailout Set in Motion," begins as follows:

"The Bush administration yesterday proposed a historic $500 billion bailout of financial firms that would let the government rather than the cold judgment of the marketplace decide the winners and losers from the crisis that has shaken the U.S. economy for the past year."

I wonder if President Bush now thinks he should have lost confidence in "the cold judgment of the marketplace" a little sooner than he did. I'm not being facetious; I truly wonder whether, given an opportunity to turn back the clock, he would have pushed for banking and other controls far sooner than he did, or whether his overall faith in the market remains the same.

Here are links to today's other Washington Post pieces:

Five Days That Transformed Wall Street (a chart taking the reader through this tumultuous week event by event)

Transcript: Bush Remarks on Financial Crisis

Bush Press Conference (video of Pres. Bush explaining why massive government intervention was required)

Congress Members Seek Details

Bailout Is As Big As Budget for the Pentagon  (Wow!)

Convincing Congress -- A Joint Decision to Act: It Must Be Big and Fast

Tossing Aside History, Convention, and a Few Cliches

U.S. Stock Markets Soar on Financial Rescue Plan

What the Candidates Can Do

Bush Urges Congress to Enact Rescue Plan

On Alert in Asia -- Japan, China Locked In by Investments

Mortgage Finance -- 4 Fannie Executives Quit; Pay Revamped
 

Public Citizen and EFF file amicus brief opposing Jones Day trademark strike suit

by Paul Alan Levy

In a previous post, I discussed abusive trademark claims put forward by Jones Day seeking to suppress speech on the BlockShopper web site about two of its associates that it did not like.  Defendants’ motion to dismiss is due to be filed today, and I teamed up with Corynne McSherry at the Electronic Frontier Foundation to write an amicus brief, filed today , that explains many of the reasons why Jones Day’s law suit cannot be sustained.  Public Knowledge and Citizen Media Law Project are also on the brief.

We argue that there is no infringement claim because the exhibits contradict the allegations of likelihood of confusion (indeed, the notion that anyone would be confused is preposterous); that when fundamental First Amendment rights are at stake the plaintiff must do more than make conclusory allegations of likelihood of confusion; and that BlockShopper made nominative fair use.  We argue that there is no dilution claim because Jones Day is not a famous mark now that the cause of action for niche fame has been eliminated and the complaint does not properly allege famousness, and that all three statutory exemptions from dilution – noncommercial use, news reporting, and fair use – apply in this case.

Times Article Which Raises Questions About Responsibility for Loan Losses

As bailouts proliferate, today's Times has a particularly interesting article on the impact of the mortgage crisis on one family: "Coming Up Short: The Pain of Selling a Home for Less Than the Loan."  Mike and Linda Kelly of Central Valley, California owe $300,000 on their home and want to sell it.  The best offer they could get is $220,000, or $80,000 short of what they owe.  The lender, CitiMortgage, agreed to a sale at that price, but at the last minute told the Kellys they would still have to pay $40,000 over the next 20 years, at the rate of $166 a month.  In essence, the Kellys and Citi would split the loss, except that since the Kellys would have 20 years to pay their share, Citi would bear more than half the loss.  The Kellys asked if their share could be cut to $20,000, but before Citi responded, the buyer pulled out.  One of the interesting things about the article is it conveys a sense that the Kellys feel entitled to walk away from their debt without paying it (though you can never be sure about these things because you don't know what they said to the reporter that didn't get quoted in the article).  Thus, the article includes the following:

Feeling trapped, the Kellys are increasingly angry at Citi and other financial firms. “They damaged our economy and don’t take any of the responsibility, not really,” Mrs. Kelly said. Nevertheless, on Aug. 26, she mailed in the September mortgage payment.

Yes, Citi damaged the economy--and it looks like Citi is taking a loss because of its loan to the Kellys--but don't the Kellys also have some responsibility for their choices?  Is this a situation where the Kellys think that if their home had appreciated in value, they should keep the increase, and if it declines, the bank should bear the loss?  This doesn't look like a case in which the borrower was deceived into taking out a mortgage: Mr. Kelly works in financial services, which suggests some understanding of finance (though since the article doesn't say exactly what he does, it's impossible to be certain; Mrs. Kelly seems not to work but volunteers at a blood bank).  But there's an even sadder postscript: Mr. Kelly was laid off shortly after the Kellys sent in their September payment.

More Bushvilles

The Associated Press issued a new story yesterday on tent cities full of homeless people in Reno and elsewhere.

RTC or HOLC revisited?

Some time ago I blogged about proposals to bring back something like the Homeowners Loan Corporation from the 1930's, to buy bad mortgages from banks and restructure them. It seems this idea is catching on. Today's stock market rose on rumors that the Administration is planning to propose a new RTC or HOLC. Presumably this would require some help from Congress.

Banks in Denial

By Alan White

At a Congressional hearing yesterday the major banks that now control most of the mortgage servicing in the U.S. made it clear that they are very unlikely to write down the mortgage balances of homeowners facing foreclosure. Chairman Barney Frank responded by saying that if the Hope for Homeowners program, taking effect October 1, does not elicit voluntary write-downs by mortgage servicers, Congress will take stronger measures to make it happen. I presented some of my research showing that fewer than 2% of mortgage modifications in the past twelve months have reduced principal balances.

Congress enacted the Hope for Homeowners program in July. It offers homeowners facing foreclosure and owing more on a mortgage than their home is worth the chance to get a new, lower FHA mortgage. The plan depends, among other things, on the willingness of mortgage servicers, acting for investors, to accept less than full payment on existing mortgages. This voluntary write-down (to 90% of the current market value) assumes that servicers will act rationally, given that foreclosed houses are now selling at losses of 40% or more. One should be careful, however, about assuming rationality.

Corey Ciocchetti on E-Commerce and Information Privacy

Corey Ciocchetti has written "E-Commerce and Information Privacy: Privacy Policies as Personal Information Protectors," 44 American Business L.J. --.  Here's the abstract:

This article dives into the contemporary debate surrounding information privacy in the twenty-first century e-commerce environment through the lens of consumers submitting personally identifying information into the vast abyss of cyberspace. I argue that this information must be better protected and that United States law should emphasize electronic privacy policies as privacy-protecting devices. Currently, the United States operates under primarily a self-regulatory environment where the federal and state governments allow industry to regulate the use and content of their privacy policies. This article details [the] current state of the United States legal regime, addresses its inefficiencies in this area and proposes a new federal law designed to remedy this situation. This piece argues that with minimal governmental regulation, electronic privacy policies can become effective tools to protect consumers personally identifying information.

Federal Bailout of Insurance Giant AIG

The Wall Street Journal reports here on the U.S. government's $85 billion bail out of insurance giant AIG.

Lehman Brothers's Bankruptcy Petition

For all you nerds out there, here's Lehman Brothers's bankruptcy petition. Thanks to Credit Slips!