DANIEL GROSS

Why Congress Is Failing America

The financial catastrophe and the WaMu collapse reveal that Washington bureaucrats can handle an emergency, but politicians can't.

PHOTOS

What They Got Away With

A look at the CEOs who walk off with mountains of money

Gallery: Recession Proof Careers

Gallery: They Got Their Bailout. But What About Us?

By Daniel Gross | Newsweek Web Exclusive

Sep 26, 2008 | Updated: 10:25 a.m. ET Sep 26, 2008

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Last night, the troubled financial system had to absorb two fresh blows: the failure of Washington Mutual and the failure of the White House and Congress to reach a consensus on a proposed bailout package for banks like Washington Mutual. The big irony? The failure of a bank with $307 billion in assets, the largest bank failure ever by far, is causing the tiniest of ripples, while the failure of business as usual—who could have imagined that the Bush administration would be unable to bring along its allies in the House and Senate?—is inducing rage and panic among CNBC talking heads.

It is a tale of two systems. One system, the one used to process failed and faltering banks, works really well. It's been in place and evolving for 75 years, since the Federal Deposit Insurance Corp. was founded (over the opposition of bankers, it must be added). Since then, not a penny of depositors' money has been lost, and the banks continue to insure themselves against their own incompetence. The FDIC insurance fund contains about $45 billion, and analysts had feared that the failure of a bank the size of WaMu (it had $188 billion in deposits) would swamp the fund. But the FDIC has a professional staff, run by a highly competent and intelligent manager, Sheila Bair. Having already handled a baker's dozen of failures this year, the FDIC has the drill down.

There are also, thankfully, a few competent bankers left in the world. Many of them work at JPMorgan Chase, which has agreed to acquire WaMu's business. WaMu's failure will cause real dislocation—stockholders and many boldholders are likely to be wiped out. But WaMu's depositors will be made whole. The FDIC won't have to dip into the insurance fund. JPMorgan Chase is assuming WaMu's troubled mortgage business. It will take a charge for those bad debts and raise new capital from the private sector to deal. It's a big headline and a big story, but in the scheme of things, a blip. A large boat slipping silently below the sea while all the passengers escape with their lives. This system is a force for order.

The other system—the process by which Congress and the White House make legislation—is an OK system in the best of times, and a completely FUBAR one at the worst. It has many competent and well-meaning professionals in it. But it also has a bunch of incompetent malefactors. For the past week, this system has been lurching toward a proposal to bail out banks by raising taxpayer funds to purchase bad assets. The plan, released last Friday, was the brainchild of Treasury Secretary Henry Paulson and was instantly endorsed by President Bush and Federal Reserve Chairman Ben Bernanke.

Last weekend, Congress got involved. And throughout the week, all parties involved gave the outward impression that they were moving toward an agreement. On Wednesday, a senior official involved in the talks assured a group of journalists that the grownups were in charge. Only they weren't. Democrats, who control Congress, were unwilling to pass what amounts to a massive tax increase on their own. Senate Republicans signaled their willingness to go along, but House Republicans said they wouldn't provide any votes. Nonetheless, Wednesday night President Bush addressed the nation, warning of dire consequences unless the bailout plan was passed. He proclaimed an era of good feeling—"there is a spirit of cooperation between Democrats and Republicans, and between Congress and this administration"—but didn't seem to expend much effort whipping House Republicans in line. John McCain suspended his campaign and parachuted into Washington, forcing Obama to attend a staged meeting at the White House.

Throughout Thursday, word was leaked that the contours of a deal had been agreed upon. The markets rallied. Last night, the word came that there was to be no deal. The evening ended with Treasury Secretary Paulson begging House Speaker Nancy Pelosi to save the economy, but conceding that the real problem was his fellow Republicans. Friday morning, the markets were emitting a primal scream. This system is a force for chaos.

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Posted By: Krohn @ 10/01/2008 8:57:30 PM

A man of great wisdom:
http://www.atlah.org/broadcast/manningreport.html
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Posted By: Davole @ 09/30/2008 7:23:24 PM

A Proposal to Resolve the Fannie Mae and Freddie Mac Financial Fiasco

In order to solve what has been termed the financial crisis, it is necessary to identify the cause of Fannie Mae???s and Freddie Mac???s catastrophic failure.

The cause of their downfall is the partisan democrat pressure put on those companies to grant sub prime mortgages to persons who would be unable to repay those loans.

The democrat senators and representatives, who mandated that financial background checks be considered unnecessary and unwarranted, facilitated that irresponsible granting of mortgages to those unable to repay. The motive of the democrat members of Congress was strictly and blatantly partisan - to buy votes, and to maintain years of party support.

In 2005, John McCain co-authored a bill to investigate and regulate the faulty business practices of Fannie Mae and Freddie Mac, but that was opposed and defeated by the democrats in Congress.

On many occasions, President George W. Bush introduced proposals to regulate the mortgage lending companies, but those calls for regulation were opposed, obstructed, and defeated by democrats who were obsessed with the continuance of faulty lending practices.

In order to reform the financial sector, it is necessary that the sleazy politicians and top administration of those 2 mortgage companies who perpetrated fraudulent activity be publicly identified, investigated, and severely punished for their undermining the national economy.

It is only reasonable to expose the corrupt financial practices and their facilitators, and to remove them from any further activity, before any effort can be made to resurrect the American economy.
Otherwise, any attempt to do so will be useless, because the problems and perpetrators would still be present to frustrate and obstruct any meaningful remedial action.
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Posted By: Davole @ 09/30/2008 7:22:29 PM

Continued - A Proposal to Resolve the Fannie Mae and Freddie Mac Financial Fiasco

The first step toward economic recovery would be to isolate all sub prime mortgages from the assets of Fanny Mae and Freddie Mac, and to group the remaining viable ones into several stock options to be offered for sale to the public, and also as a bailout measure.

That would result in an immediate infusion of cash into the banking sector, thereby ensuring that credit could be granted to qualifying loan applicants.

Individuals or organizations who choose to buy those stock options should benefit additionally from any profits later realized by their investments.

Also, any profits resulting from the bailout option should be refunded to the INCOME TAX PAYERS only, since they would be the ones who would have financed the bailout.

Likewise, but separately, the various questionable sub prime mortgages should be bundled together into other stock options which would be structured to contain a mixture of both somewhat and less redeemable loans.

Those sub prime mortgage packages should be offered first to democrats, especially wealthy ones, who might be attracted to them by their being valued at a price of 80 cents on the dollar, based on the face value of the mortgages.
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That would afford them the option to support what democrats viewed to be a noble cause (home ownership for the unemployed), and besides, it might enable the stock option buyers to profit by 20 percent if all of the sub prime mortgages would be somehow repaid by the homeowners.

Thus democrats, especially the likes of George Soros, Barack Obama, Ted Kennedy, Chris Dodd, Nancy Pelosi, Harry Reid, and Charlie Schumer (who supported the granting of sub prime mortgages irrespective of demonstrated ability to repay) would be able to ???put their money where their mouths are???!

Lastly, there should be a guarantee that no further sub prime mortgages be granted.
Home ownership is a GOAL for many financially responsible Americans - it is not a government sponsored RIGHT for all persons living legally and illegally in the US!