EU Presidency: Obama Plan is “A Highway to Hell’

 Fox NewsSTRASBOURG, France —  A top European Union politician on Wednesday slammed U.S. plans to spend its way out of recession as “a way to hell.”
Czech Prime Minister Mirek Topolanek, whose country currently holds the EU presidency, told the European Parliament that President Barack Obama’s massive stimulus package and banking bailout “will undermine the stability of the global financial market.”

A day after his government collapsed because of a parliamentary vote of no-confidence, Topolanek took the EU presidency on a collision course with Washington over how to deal with the global economic recession.

Most European leaders favor tighter financial regulation, while the U.S. has been pushing for larger economic stimulus plans.

Topolanek’s comments are the strongest criticism so far from a European leader as the 27-nation bloc bristles from recent U.S. criticism that it is not spending enough to stimulate demand.

They also pave the way for a stormy summit next week in London between leaders of the Group of 20 industrialized countries.

 

The United States plans to spend heavily to try and lift its economy out of recession with a $787 billion economic stimulus plan of tax rebates, health and welfare benefits, as well as extra energy and infrastructure spending.

“We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way,” he said.

“Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the stability of the global financial market,” said Topolanek.

http://www.foxnews.com/story/0,2933,510445,00.html

Post Script: Apparently, Prime Minister Topolanel is a fan of the Austrailian Rock Band AC/DC.  The Prime Minister states that he has been misquoted – the statement above should read  – “Obama’s Plan will put us on the “Highway To Hell”. Something didn’t translate quite right. The Prime Minister had recently attended an AC/DC Concert and the song was stuck in his head. “Highway to Hell” references in political speeches! “Stairway to Heaven” as musak in elevators. I guess ” the times they are a changin”.      

An Argument Against The Bailout – By: Cody Willard

It doesn’t take much to get Cody Willard riled up about the $700 billion Wall Street bailout package recently defeated by the U.S. House of Representatives.

“We’ve had 200 years of private ownership of profits and losses, and somewhere, we came up with the idea that we could never have a down year,” Willard said. “Not every year will be an up year.”

Willard, a Ruidoso native who co-hosts the show “Happy Hour” on the Fox Business Network in New York, was in town Monday and Tuesday, working on a feature on his hometown.

The assignment will give him a chance to show off the village he called home until his high school graduation in 1991, but he’s made a name for himself in the concrete canyons of New York City, both as a financial analyst for Fox and as the founder of an investment management company.

As such, when Willard speaks about the state of the national economy – and the government’s attempt to bail out some major investment firms – his word stands to carry some weight.

“If the Depression taught us anything, it’s that government socialism only exacerbates the problem,” Willard said. “This would be the greatest redistribution of wealth upward in the country’s history. There’s nothing beneficial to anyone but the big firms on Wall Street.”

Unsurprisingly, Willard isn’t in favor of the proposal, which was voted down by lawmakers in Washing-ton on Monday, but is likely to be re-introduced soon with significant changes.

“I don’t think we’ll be able to stop it this time,” Willard said. “It will be tough to beat, but then I thought the first bill wouldn’t be defeated, either.”

Willard has written several articles on the proposed bill on the http://www.foxbusiness.com Web site, and has reported about 99 percent of all comments are in agreement with him against the bailout package.

His most recent post was written while in Ruidoso, in which he reported a majority of the locals are against the bill as well.

“I don’t know a single person here who is for the bailout,” Willard writes. “A well-off elderly couple even laughed today when I asked if they thought they’d have trouble getting a loan from the local bank if Wall Street isn’t bailed out.

“I said, ‘what’s funny?’ They said their local bank hasn’t overextended itself and has prepared itself for the just-started local real estate downturn and that they’ve got capital to put down if they wanted to.”

That comment illustrates what Willard believes about the national economy – that it runs not on the backs of major investment firms in New York, but on the hard work and ingenuity of small businesses and small investors throughout the country.

“The small businesses that are the lifeblood of small communities like this are also the life blood of the country,” Willard said. “Taxing them to bail out big banks and investment firms can’t help anybody.”

http://www.ruidosonews.com/news/ci_10603025

You Want Free Market Solutions? You Got ‘Em!

You Want Free Market Solutions? You Got ‘Em!

By Cody Willard

So what’s the alternative to extorting a trillion dollars from middle America for the sole direct benefit of rich bankers and NYC?

1. Suspend FASB 157 which earlier this year, because it requires ibanks to value their mortgage junk that’s being puked at 6 cents on the dollar at places like Merrill Lynch, contributed to the virtuous cycles now turned vicious.

2. Bring back the uptick rule. Shortselling a company is fine and dandy…but pounding down on a stock in an illiquid market by relentless shorting into whatever bids are out there has been a big factor in how quickly Lehman and others failed.

3. Let the billions of brilliant people on this planet take advantage of the concepts of private ownership and the ability to profit therein as this vicious cycle creates huge opportunities for everybody. That’s really the single biggest issue I’ve got with all these fear-mongering socialists who seem to see this economy and the people in it as a static blip on a chart. Take Bill Gross at PIMCO (please take him — I’m talking to you, Communist China, he’ll fit right in with you guys now that he’s a huge advocate of central allocation of capital and all with this bailout bill) has about a trillion dollars under management. He wrote in an editorial that he thought the government would make a ton of money if they’d give the insolvent banks 60 cents on the dollar for that stuff that’s trading at 6 cents on the dollar right now. If he truly thinks that, then I’m pretty sure he could figure out a way to sell enough Treasuries and government bonds back to the government and raise enough capital from private investors that he could make that 60 cents on the dollar bet himself. Privately, without extorting capital from middle America.

4. Moreover, how about we let the little geniuses out there create small businesses that can take advantage of the opportunities now being created in the financial industry instead of expecting the guys with absolutely wild conflicts of interest who are in utter panic mode (Paulson, Bernanke, Bush, Pelosi, Hilary et al) to be productive at fixing the system.

I mean, after speaking for about half an hour offline with true-freedom lover and former Treasury Secretary, Paul O’Neil, discussing this stuff the other day, I heard several of the former-freedom-loving rich white dudes you see on TV who have taken to begging you for your tax dollars actually start to discuss some ways they could privately profit off this Wall Street Crisis of 2008.

I personally am thinking about starting a website called “MyUnderWaterMortgage.com” where people can privately pool their underwater mortgages — perhaps by vintage or location or state or something if there’s enough critical mass — and then those underwater mortgages could be packaged and sold to private investors who then pay off the banks who will simply be thrilled to get some cash that’s not 6 cents on the dollar for this mortgages. And I’m just one cowboy who came up with that one idea in just one night. Hey you fear mongering commies who keep telling us that if you don’t have complete control of the industry that we’re going into a Great Depression: LEAVE US ALONE. LEAVE THE SYSTEM ALONE. LET US GET BACK TO WORK!

PS. Here’s an article from my local newspaper with more of my take on this stuff.

http://cody.blogs.foxbusiness.com/2008/10/01/you-want-free-market-solutions-you-got-em/

You can watch Cody at 5:00 PM (est) on Fox Business Channel’s “Happy Hour”.

Want to Know What “Mark To Market” Is – Elizabeth MacDonald Will Tell You

By Elizabeth MacDonald – Fox Business

October 1, 2008 12:28PM

A New Rule Change That Could Hurt Taxpayers

A little understood but very important accounting rule being blamed for the $523 bn in losses and writedowns at financial companies around the globe is now being retooled by market and accounting regulators, in a last-ditch attempt to stop the steam pipes bursting and to get banks lending again.

However, the move matters greatly to taxpayers, because analysts now say that banks who own severely damaged mortgage-backed bonds may be able to use the changed rule to get higher prices for these securities if they auction them off to the government as now planned in the $700 bn rescue bill.

The rule change comes just at the end of the third quarter, which means companies may be spared the pain of big third-quarter losses and writedowns.

And it comes as the Federal Bureau of Investigation is probing Wall Street firms to search for criminal securities fraud in the valuation of these bonds.

How it Works

Here’s how it works.

When borrowers get loans, the banks typically sell these loans to Wall Street firms, who then repackage them as bonds backed by the value of a house or property. Wall Street then sells these bonds to mutual funds, pension funds and all sorts of investors around the globe.

As house prices drop in value, so, too, do the value of these bonds, which vary in type as mortgage-backed securities, collateralized debt obligations (CDOs), even CDOs of credit default swaps or exotic bonds called CDO-squareds.

The accounting rule says that companies that own these bonds must value these bonds each quarter as if they were going to be sold immediately. That process is called “mark to market.”

But since these bonds have dropped in value, they are regarded as Kryptonite because no one wants them.

Companies must then book these losses on these bonds even if they did not sell them. “Mark to market” has since been jokingly called “mark to mayhem” and “mark to madness.”

Relaxing the Rules

The Securities and Exchange Commission and the Financial Accounting Standards Board have now “clarified” existing mark to market accounting rules saying companies have leeway in assessing value, and do not have to use the current market price, which is of course way down.

The SEC and the FASB basically say that companies are not required to book fire sale prices when valuing these illiquid assets, including mortgage-backed bonds. Instead, management can use their own internal assumptions to measure fair value.

Specifically, the accounting regulators said that companies were initially supposed to use fair values based on an “orderly transaction” between willing market participants. However, “distressed or forced liquidation sales are not orderly transactions,” the SEC said in a statement. 

Don’t Blame the Rule

It’s important to remember here that no one really knows the value of these bonds and whether they are worth more or less than what the market says they are worth because the cash flow is or is not really there.

It’s important, too, to remember that it’s not just an accounting rule that can be held to blame for record losses, but the fact that banks got themselves into trouble by recklessly giving too many loans to borrowers who either were irresponsible or could not afford them.

It is no small irony that the government’s plan essentially is an attempt to put a floor under these bad securities that were written down according to a governmental accounting body’s rules.

The question now is whether this accounting rule change will reflect the true value of these assets and whether doing so will force Congress to dole out the full $700 bn–or more–to rescue these assets.

Record Losses

The losses have caused banks to be in violation of their statutory capital requirements, forcing them to raise capital to plug balance sheet holes. The losses are also the reason why a growing number of financial companies have shut down, been forced into mergers, or been nationalized.

And the losses are behind the reason why the Federal Reserve and central banks around the world have pumped record amounts of liquidity into markets, and have pushed the US central bank and the US Treasury to let banks dump their illiquid mortgage-backed bonds for more liquid Treasuries.

The decision by the Securities and Exchange Commission and the Financial Accounting Standards comes as the London interbank offered rate, or LIBOR, hits record highs. Many adjustable rate mortgages–including dodgy no income verification loans and interest only loans–in the US are due to reset to higher interest rates because they are tied to LIBOR, which is the rate that banks in Europe charge each other for such loans.

As more loans go belly up due to the higher rates, that means more losses for banks and financial companies.

The financial-services industry has been lobbying the SEC and FASB for months now to alter the rules, a lobbying that picked up speed in the wake of the new $700 bn Congressional rescue bill that would set up a reverse auction mechanism to let banks unload these damaged bonds onto the government. Congress may include the change in its new version of the rescue plan.

The American Bankers Association had complained to the SEC that auditors were forcing banks to value these bonds at unrealistically low “fire sale” prices, rather than at the higher values the banks believe these bonds should be worth in an orderly market.

There is also some talk in Congress of a temporary or permanent repeal of the mark to market rules to allow for more long-term valuation of assets and loans.

The Problem with the Rule

The problem with this accounting has always been what critics say is its punitive effect.

Companies have to record resulting losses from this mark-to-market exercise, which some say is the equivalent of sticking a finger in the wind, as if they actually lost cash even if they did not actually sell the bonds at all, and even if the cash flows are still coming in higher than what the market says the assets are worth (Fannie Mae and Freddie Mac have said that they are solvent on a cash-flow basis, notes economist Brian Wesbury).

The writedowns taken by some firms have triggered a cascade of writedowns at other companies, as prices are seen to be set in the marketplace. For example, E*Trade last year priced some mortgage-backed bonds at 27 cents on the dollar, triggering writedowns at other firms. Merrill Lynch (MER: 26.24, +0.94, +3.71%) sold assets to the vulture fund Lone Star at 22 cents on the dollar (really 6 cents if you consider that Merrill financed 75% of this sale), also causing other writedowns.

JPMorgan Chase (JPM: 49.19, +2.49, +5.33%) bought Washington Mutual (WM: 0.16, +0.00, +0.00%) at a garage sale price, triggering fresh new prices for assets on its books that triggered anew mark-downs on the assets at Wachovia, which was shephered by the Federal Deposit Insurance Corp. into the arms of Citigroup (C: 22.84, +2.33, +11.36%). 

Risk to Taxpayers

But the $700 bn rescue plan makes the change potentially more damaging to taxpayers because the relaxation of the accounting rule means banks may be able to keep higher prices on these bonds and then unload them at higher prices at auction to the Treasury. 

“It is not in the interests of U.S. citizens and taxpayers to abandon mark-to-market accounting for a proposal in which taxpayer funds are being used,” says Janet Tavakoli, founder and president of Tavakoli Structured Finance and one of the best market analysts on the dangers of credit derivatives.

Tavakoli adds: “If we would have to sell the assets at a loss due to downward moves in market prices, we have a right to know that. If the assets have permanent losses so that even if we hold to maturity we would have losses, we have a right to know that too. At any given time, we have a right to know what our ‘investment’ is worth.”

Tavakoli adds that the danger is that the government’s new portfolio managers “can claim they are making money” while “the assets are declining in value due to defaults or permanent value destruction of collateral. This situation can continue for a long time to create the false appearance of profitability.

Tavakoli notes that “in other words, U.S. taxpayers can be told they are making money on their $700 bn investment, when in reality they are losing money. I would rather know the market price, even if the news is bad news.”

Loophole Dangerous to Taxpayers in the Rescue Bill

And check out this sentence I’ve highlighted in italics in section 101 of the new bill, entitled “purchases of troubled assets”–it could also mean even higher costs to taxpayers:   

(e) PREVENTING UNJUST ENRICHMENT. In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in Conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code.

This section “probably indicates that JPMorgan Chase can sell the troubled assets of WaMu to the US government and make windfall profits,” notes market analyst Richard Suttmeier. “Same for Citigroup with regard to Wachovia’s troubled assets. Other future deals as well. That is a direct bailout of Wall Street on the back of taxpayers.”

A Better Way

Check out what Tavakoli says is a better way than the $700 bn bailout plan:

“Rather than adopt any form of the Paulson Plan, which uses billions of taxpayer dollars and forces risk and potential losses on taxpayers–instead of those who enjoyed the gains–I advocate an alternative.”

“Instead of the Paulson Plan, we can force creditors to accept a restructuring plan (this was done during the Great Depression). Creditors (debt holders) including credit default swap counterparties would be compelled to accept a restructuring plan. That requires partial forgiveness of debt in many cases and/or a debt for equity swap (in which the government takes equity stakes in these companies).”

“If we are determined to violate personal property rights, I prefer it be done through a forced debt forgiveness and a forced capital restructuring (debt for equity swaps), rather than through a massive bailout (any of the various forms of the Paulson Plan).”

“The Paulson Plan destroys capitalism (those who stood to gain–and already made off with large gains–should bear the risk) and violates the spirit of democracy established by the Founding Fathers of the United States.”

The Common Sense Fix To The Financial Crisis – By Dave Ramsey

Below you can read Dave Ramsey’s Common Sense Fix for the Financial Crisis. Mr. Ramsey is a Nationally Syndicated Radio Show Host & Fox Business Channel Host. Watch his show at 8 PM (EST) on the Fox Business Channel (Not the FOX NEWS CHANNEL). The Bailout will be the topic of discussion tonight.

I like some of Ramsey’s suggestions, however, I’d preface any plan for resolution with the prior passsage of the Fannie Mae and Freddie Mac reform measures of 2004. Before we start to clean up this mess, we should make sure it won’t happen again. Before you start to bail out the boat, you should plug the hole and stop the water from coming in. 

I’m urging everyone to add the following to Mr Ramsey’s “fix”:

1) Suspend the operation of the Community Reinvestment Act (CRA) the Act that fostered the development of the NINJA and LIAR Loans.No more NINJA or LIAR Loans.

2). Remove the Boston Federal Reserve Manual from use. Reverse the changes made in mortgage  underwriting standards by this Manual. This is the manual that was used to coerce Banks into making the worst of the sub-prime loans.

3). Implement the proposed 2003-2004 Accounting and Oversight Provisions for Fannie & Freddie that were blocked. Are there Congresspeople who would stand up today and say – “There is no problem with Fannie or Freddie” ? 

These suggestions do not require an outlay of taxpayor cash.

Lets correct the problem before we try to clean up the mess.

 

DAVE RAMSEYS COMMON SENSE FIX

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer.

As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three steps:

Common Sense Plan.

I. INSURANCE

A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

B. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.

a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.

b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

C. This backstop will cost less than $50 billion—a small fraction of the current proposal.

II. MARK TO MARKET

A. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.

B. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.

III. CAPITAL GAINS TAX

A. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

B. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy.

This will enable all Americans to have more stable jobs and retirement investments that go up instead of down.

This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to stand up, speak out, and fix this mess.

http://www.daveramsey.com/common_sense_fix.txt

Read Ramsey’s Article Here: http://www.daveramsey.com/etc/fed_bailout/3_steps_to_change_the_nations_future_10928.htmlc?ictid=sptlt

WATCH THE ACTUAL COMMITTEE TESTIMONY – HOW THE REFORM REGULATION OF FANNIE AND FREDDIE WAS BLOCKED

WATCH THE VIDEO HERE:  http://www.youtube.com/watch?v=_MGT_cSi7Rs&eurl=http://gatewaypundit.blogspot.com/2008/09/devastating-dems-refuse-to-reform.html

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