The Senate may have proved to be so great at fishing this week I think we should move them to ESPN or at least the Outdoor Network. 

The House is debating the economic bailout today and they are optimistic they will pass the $700 billion bailout (oh yea, and the other $110 billion in pork additives to buy their votes). Did I say that?

Come on; let’s just go over the facts. 

1. The Bailout gets shot down in the House. They don’t like it; they think it is a bad way to help. It falls 13 votes short of passing. 

2. Senate decides to take a shot. They add some pork to help sway those that didn’t vote for the bailout. Is this not bribery? “Hey, I know you think the bailout is a bad idea, but what if I throw in some stuff – completely unrelated – that you want?” 

3. House Approves the Bailout, the President signs it. 

Now the House all of a sudden “feels good” about the bailout? 

Rep. John Boehner, the House Leader, said “Is it perfect? No. But its clearly better than it was a week ago,” “I’m optimistic about today.”

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Yesterdays meeting over the proposed bailout turned into a playground brawl. Macaroni was thrown in the lunchroom and some politicians were given swirlies in the restroom. Ok, maybe not to that extent but it is how I picture it in my mind. 

The Democrats say they reached bipartisan agreement, the Republicans are not so sure. Obama and McCain were present and I don’t think anybody on the road missed them. 

Far from solved, some of the issues are far reaching and cross the line to new ground. 

For starters, I am very interested in the draft that would require limits on compensation for the executives participating in the bailout. Yes, you heard right, they are considering limiting excessive “golden parachutes” for the executives that ran the failing companies. I hope it did not take “America’s Best” to figure that one out – unless of course some of the politicians are on payroll. 

Why on earth would you not limit the compensation? How about you limit it to say…ZERO. If the companies go under (without the help of taxpayer money) I suspect their current golden parachutes would fail to open under any circumstance – so why should the taxpayers fund any of it? 

Another point is whether, going forward, bankruptcy judges will be able to modify mortgage terms. Although perhaps seeming good for the consumer on the surface, these newly structured loans go back to pay…well, us. Good luck finding any lender in the future if the courts can go in and change the terms at any time. 

The upside? 

It appears they are not looking at dropping $700 billion all at once. The draft calls for Congress to make $250 billion available with another $100 billion on standby. 

Why the delay? 

Well, I would like to think it is because some people in DC are coming to their senses; that taxpayers bailing out private companies might not be a good thing. In reality I am going to guess the Treasury just can’t print money that quick without jamming up the machine. 

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When Mexico was in serious financial straights the US said the (Mexican) government needed to stay out of the way – the market knows best. 

When Russia was on financial brink, again, the US said government intervention should never happen – you should be like us.

When Thailand was….nevermind…you get the idea. 

We are real good at telling other governments they need to stay out of their country’s “free market” affairs even when the result includes joblessness and domestic turmoil. The economic system will correct itself…well, unless it happens to us – then the rules change. 

The Federal bailout is approaching (and will pass) the Trillion-Dollar mark. What is on the table so far? 

$300 billion for failing mortgages.

$200 billion loans to banks

$200 billion to buy Fannie Mae and Freddie Mac

$87 billion to JPMorgan for financing Lehman trades

$85 billion to buy (79%) of AIG

$29 billion to JPMorgan to buy (failed) Bear Stearns 

Is this a glimpse of a US move towards Socialism? Well, the government will now basically control the lions’ share of mortgage lending (Fannie Mae and Freddie Mac) and Insurance (AIG).

I think Sen. Jim Bunning (R-KY) summarized it pretty well. “The only difference between what the Fed did and what Hugo Chavez is doing in Venezuela is Chavez doesn’t put taxpayer dollars at risk when he takes over companies. He just takes them.” 

Think about it. The US, with taxpayer dollars, has taken over failing companies for billions of dollars. If they are right, and companies rebound, the government has serious intervention into the once private sector. If they are wrong, and the companies fail, taxpayers deal with more loses and ongoing repercussions. Sounds like a no-win situation to me.

I don’t think we should have bailed the companies out. Yes, I know jobs would have been lost. I know the economy would have suffered as it worked its way back to manageable levels. But I also know that “just print more money” is not the path to recovery. 

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The historic seizure of mortgage giants Fannie Mae and Freddie Mac will have far outreaching ramifications. With both executive boards on their way out (with incredible settlements I may add) the government is stepping in. So what does all this mean to you? 

Stability (or Stop the Bleeding!) – Fannie Mae and Freddie Mac back more than half of all U.S. Mortgage Debt. During the recent months the product line has been particularly volatile (creating a large gap between these bonds and a 10-year Treasury Bond). Any stability in this arena will quiet investors (in a good way!). 

Rate Drop – Since both entities will now effectively be government-owned you should see as much as a 1 percent drop in rates. Think of it as “direct to the manufacturer” pricing. This will be essential for banks to get back in the game. 

Weather the Storm – Nothing will fix the current situation overnight but it does help ensure the companies will not run short of cash anytime soon.  Large companies such as Pacific Investment Management Company (world’s largest bond fund) were not looking to buy unless the government took action. 

Not being one for government intervention to begin with…

I have to say this is a good move for most of us in the long run. Essentially we have cut out the middleman in order to stop the current turmoil. 

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The mortgage industry is hurting, values are down, and relief is coming; but there is a catch. A big catch if no one is reading the fine print. 

First-time homeowners. 

The Rescue Part… 

You will get a tax credit of up to $7,500 – provided you have not owned a home in three years. That is a tax “credit” not to be confused with a tax “deduction.” 

The Catch… 

That money has to be repaid starting two years after you purchase the home. If you take the full $7,500 tax credit, your tax bill will increase $500 a year for fifteen years.  If you sell the home early, you will owe the government the balance.

Forgiveness for refinancing. 

The Rescue Part… 

In a nutshell if you wish to refinance the lender forgives all debt above 90% of the homes current value. You then get a new mortgage that is insured by the FHA. 

The Catch… 

First off you will need to pay a FHA insurance premium of approximately $2,700. Secondly, you will have to share your homes appreciation with the FHA. If you sell your home (or payoff the loan) less than a year after refinancing, the FHA gets all of the home appreciation. One to two years? FHA gets 90%. It then decreases at 10% per year but never lower than 50%.

I know this plan seemed great when it was being thrown around in the media and during political campaigns, I just hope people are reading the fine print. 

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When will we learn from our mistakes? Or perhaps better said, “how will we ever learn?” 

The government, like an over-bearing parent, is going to swoop in and attempt to fix the current housing crisis as opposed to allowing the natural set of consequences to play out. This isn’t Monopoly, this is real money, and this “rescue legislation” is definitely a case where they are going to do considerably more damage than good. 

I don’t even know where to start. Let’s see… 

Provide Fannie Mae and Freddie Mac an unlimited credit line to make housing loans.  – Yea, and why not provide teenagers an unlimited credit card to use at the mall? 

Provide bail out to an estimated 400,000 homeowners in trouble.  - Don’t get me wrong, I feel very sorry for people losing their homes. Many were just hit with bad timing and 400,000 is not even a drop in the bucket of people in trouble. But many simply purchased too much house. When you can’t afford to make the (normal) amortized payments perhaps you should have been looking for a smaller house from the start. 

Modernize the FHA and allow riskier loans. – You are kidding right? You did say “riskier?” Yea, that will solve it all.

The rest of the items included in the “rescue legislation” are similar but small in nature. Provide tax breaks for low-income housing, provide grants for communities to purchase foreclosed properties – none of which have enough dollars associated with them to last more than 5 seconds on the radar. 

What has happened across the country is no doubt tragic, but it could (and should) have been avoided. Largely caused by greed, it only gets worse when no one learns their lesson – a lesson by no means limited to homebuyers. 

Lenders need to learn you cannot create loans that jeopardize the borrower (or the economy for that matter). The lenders would have learned that lesson by the increased amount of loans failing (kind of hard to learn if you have a big bailout). 

It is going to be tough for a lot of us but we need to let the natural order of economics take care of itself. We will emerge, at the end, stronger and wiser. The government needs to stay out of this one! What are your thoughts? 

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