Frustration and anger are two feelings that come bubbling forth from my gut as I watch the drama unfold in regard to the rescue plan for our financial system being deliberated before my eyes. At the heart of the matter sit the two Government Sponsored Enterprises (GSE's) Fannie Mae and Freddie Mac. The utter disregard for the facts by the mainstream television and print media, Barney Frank and Christopher Dodd completely amazes me.
The implicit guarantee of government backing for mortgage securities peddled by the two GSE's, as they operated under the guise of "providing affordable housing", gave them the ability to enjoy lower interest rates on their bonds, which in turn allowed them to prevail over private companies providing mortgage backed securities. The increased leverage, lack of competition and tacit approval of their operations by politicians receiving campaign contributions through their lobbying efforts allowed their CEO, Franklin Raines, to earn over 100 million dollars, before being ousted for accounting irregularities. Now Frank and Dodd are trying to position themselves as champions of Main Street, while the financial system grinds to a halt. For a more in depth analysis of the Fannie & Freddie debacle, see the articles in the Wall Street Journal and Investors Business Daily from Tuesday, September 23, 2008.
Ben Bernancke was elevated to Federal Reserve Chairman because he was respected for his knowledge and credentials. Hank Paulson was called upon to be Treasury Secretary because of his knowledge of the financial markets. If they are this concerned about the current crisis in our financial system, I think we better stop with the politics and soberly address the situation. This is NOT a bailout of Wall Street, but rather a rescue of our financial system. If the stock market is halved again in this decade, the pain on Main Street will be devastating. We all enjoyed the rising equity in real estate from 2002 through 2006, but the sad reality is much of it was based on smoke and mirrors. Perhaps this will usher in an era of building wealth methodically through investing, rather than the get rich quick schemes of day trading, real estate flipping and other fads which have led to bubbles and busts. One could only hope!
John H. Kaighn
Jersey Benefits Advisors
The Kaighn Report
Wednesday, September 24, 2008
Wednesday, September 17, 2008
Resolution Trust Corporation Redux?
Perhaps with the government loan guarantees for the orderly liquidation of AIG, it might be time to establish an entity similar to the Resolution Trust Corporation, which was charged with the orderly liquidation and auction of assets of failed savings & loans back in 1989. While the government could actually make money on the deal it crafted with AIG, the establishment of an entity, such as the RTC, might make any further bankruptcies of banks, investment banks or insurance companies more routine, and eliminate the sensational reporting of these various crises when entities deemed "too large to fail" begin to falter. The current financial difficulties we are now experiencing are not without precedent, and the irresponsible references to current events being similar to the Great Depression are simply unacceptable.
While I realize Mr. Obama is running for President, he should be using his position to reassure the public that the economy is indeed sound and able to deal with situations, such as the ones we've been watching play out for over a year now. The Federal Reserve made policy errors, failed to increase the money supply, and failed to coordinate the orderly liquidation of assets during the Great Depression. The unemployment rate was a staggering 25%, not 6% as it is currently, and the stock market had lost MOST of its value during the market meltdown prior to the Great Depression, not 4% as happened with the "historic" 504 point decline on Monday. In fact, the 508 point decline in 1987 represented a 22.6% market crash, so we must use perspective when discussing the current situation.
Finally, in reference to the AIG situation, it is important to relay to the public that while the insurer is one of the largest insurance companies in the world and deemed too large to fail, the policy holders are NOT in jeopardy. With the loan guarantees, AIG's insurance businesses will be auctioned off to other insurance companies, who know it is in their best interest to be sure those policies are made whole. Insurance companies are also regulated by state insurance commissions which also back the explicit guarantees in insurance policies. An economy, in conjunction with the government, that can react to these situations and have the ability to craft deals that protect account holders and policy holders, but doesn't reward CEO's and common shareholders, is one that is fundamentally sound. Grandstanding and pointing fingers doesn't solve the problem.
The Congress, if gets off its duff and adopts a credible energy policy utilizing all of our resources to break our dependence on foreign oil, could go a long way toward STIMULATING a sound but faltering economy. Leadership will be key as we go forward. This is no time for our leaders to be crying wolf to get elected. A clear and level headed response to the economic challenges we face is paramount to reforming the weaknesses in our system.
John Kaighn
Jersey Benefits Advisors
The Kaighn Report
While I realize Mr. Obama is running for President, he should be using his position to reassure the public that the economy is indeed sound and able to deal with situations, such as the ones we've been watching play out for over a year now. The Federal Reserve made policy errors, failed to increase the money supply, and failed to coordinate the orderly liquidation of assets during the Great Depression. The unemployment rate was a staggering 25%, not 6% as it is currently, and the stock market had lost MOST of its value during the market meltdown prior to the Great Depression, not 4% as happened with the "historic" 504 point decline on Monday. In fact, the 508 point decline in 1987 represented a 22.6% market crash, so we must use perspective when discussing the current situation.
Finally, in reference to the AIG situation, it is important to relay to the public that while the insurer is one of the largest insurance companies in the world and deemed too large to fail, the policy holders are NOT in jeopardy. With the loan guarantees, AIG's insurance businesses will be auctioned off to other insurance companies, who know it is in their best interest to be sure those policies are made whole. Insurance companies are also regulated by state insurance commissions which also back the explicit guarantees in insurance policies. An economy, in conjunction with the government, that can react to these situations and have the ability to craft deals that protect account holders and policy holders, but doesn't reward CEO's and common shareholders, is one that is fundamentally sound. Grandstanding and pointing fingers doesn't solve the problem.
The Congress, if gets off its duff and adopts a credible energy policy utilizing all of our resources to break our dependence on foreign oil, could go a long way toward STIMULATING a sound but faltering economy. Leadership will be key as we go forward. This is no time for our leaders to be crying wolf to get elected. A clear and level headed response to the economic challenges we face is paramount to reforming the weaknesses in our system.
John Kaighn
Jersey Benefits Advisors
The Kaighn Report
Thursday, September 11, 2008
Fannie Mae and Freddie Mac RIP
The Government Sponsored Entities (GSE) known as Fannie Mae and Freddie Mac succummed to the credit crisis and were taken over by the US government, which brings to a close their checkered history as a failed government experiment. While the Bush administration will shoulder the criticism for propping up private companies and serving the interests of the rich, this is simply not the reality of the situation. Unfortunately, many in this administration, as well as previous administrations and Congresses voiced their concerns about the "implicit" government backing these companies enjoyed, but to no avail.
By being a GSE these companies operated as if they had the full faith and backing of the Federal Government, even though they didn't, because they were quasi public companies. A little history helps to understand the dilemma. Fannie Mae was created by the government during the Great Depression to buy mortgages, which they guaranteed with the full backing of the government. In 1968, President Johnson created the current structure of Fannie Mae, but without the guarantee. In the 1970's, Freddie Mac was created and the two quasi public entities began buying mortgages and packaging them into securities, which were purchased by banks, investors, governments and others around the world, because of the implicit guarantee that if anything went wrong, the US government would back the securities.
As we all know by now, the two GSE's did fail, and while the reasons are varied, the implicit guarantee is now an explicit guarantee. The strategy of the government should be to shrink them and eventually let them become a relic of a failed business model. The best way to back mortgage securities is by a fully capitalized private entity with enough capital to guarantee the mortgages and mortgage backed securities it has underwritten. Ultimately an expensive lesson has been learned, hopefully! You can't write mortgages for people who don't have the ability to pay them, and the bank that underwrites a mortgage must have a stake in the security that ultimately buys the mortgage. It sounds so simple!
On this 7th anniversary of the horrendous attacks on our country by Islamic terrorists, I just want to let the families of those who lost their lives know there are some people in this country who have not forgotten. May you find peace!
John Kaighn
The Kaighn Report
Jersey Benefits Advisors
By being a GSE these companies operated as if they had the full faith and backing of the Federal Government, even though they didn't, because they were quasi public companies. A little history helps to understand the dilemma. Fannie Mae was created by the government during the Great Depression to buy mortgages, which they guaranteed with the full backing of the government. In 1968, President Johnson created the current structure of Fannie Mae, but without the guarantee. In the 1970's, Freddie Mac was created and the two quasi public entities began buying mortgages and packaging them into securities, which were purchased by banks, investors, governments and others around the world, because of the implicit guarantee that if anything went wrong, the US government would back the securities.
As we all know by now, the two GSE's did fail, and while the reasons are varied, the implicit guarantee is now an explicit guarantee. The strategy of the government should be to shrink them and eventually let them become a relic of a failed business model. The best way to back mortgage securities is by a fully capitalized private entity with enough capital to guarantee the mortgages and mortgage backed securities it has underwritten. Ultimately an expensive lesson has been learned, hopefully! You can't write mortgages for people who don't have the ability to pay them, and the bank that underwrites a mortgage must have a stake in the security that ultimately buys the mortgage. It sounds so simple!
On this 7th anniversary of the horrendous attacks on our country by Islamic terrorists, I just want to let the families of those who lost their lives know there are some people in this country who have not forgotten. May you find peace!
John Kaighn
The Kaighn Report
Jersey Benefits Advisors
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