Government Role in the Financial Collapse by Ofuoma Odje
There are at least 2 facets of Government responsibility in the current financial collapse.
The first is was the aggressive promotion of home ownership by the Bush and Clinton Administrations. The New York Times front-page story on Sunday, December 21, 2008 reported that former President Bush excessively promoted growth in home ownership without adequately enforcing oversight over banks and other mortgage lenders that made the bad loans. This is now what has resulted in a banking system flooded with bad mortgages whose losses continue to drag down the banks and the economy.
The second was government policy over the last 2 decades. The Community Reinvestment Act (CRA) and the government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac are both Governmental vehicles that were used to distort the housing credit system, crash the housing market and ultimately the broader economy.
The New York Times edition of December 21, 2008 reported on home ownership in the United States since 1990. In 1993 home ownership was at 63 percent, and by the end of the Clinton administration it was 68 percent. Under the Bush administration, it grew by about1 percent to 69 percent.
The Times also reported that in 1999 the Clinton administration put pressure on Fannie Mae and Freddie Mac to increase lending to minorities and low-income home buyers.
This was of course a high risk policy that is partly responsible for today’s financial crisis because it opened the door to subprime predatory lending and other irresponsible borrowing and lending practices that abused the mortgage markets.
The Clinton and Bush administrations’ aggressive promotion of home ownership by reduced lending standards led to the housing bubble and burst.
The CRA was originally enacted in 1977 under President Carter. It mandated regulators to consider whether an insured bank was serving the needs of the entire community. The Act was set in place to encourage banks to halt the practice of lending discrimination.
The Clinton Treasury Department changed the Community Reinvestment Act in 1995. The change required banks that wanted outstanding CRA ratings to demonstrate statistically that they were lending in poor neighborhoods and to lower-income households.
Some economists say this amendment to the CRA raised the amount of home loans to unqualified low-income borrowers and also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages.
Throughout the early 90’s the Department of Housing and Urban Development pushed Fannie Mae and Freddie Mac to purchase loans based on criteria other than creditworthiness. And by 2005, these affordable housing goals mandated that Fannie Mac and Freddie Mae buy 45 percent of all loans from those of low and moderate income neighborhoods. A majority of these loans, especially the subprime ones, significantly account for today’s housing collapse.
The Federal Government housing initiatives are not the only “Government” causes of the current mortgage crisis. State Laws also gave homeowners free options that added substantially to the mortgage crisis.
As house prices increased between 2000 and 2006, State Laws allowed homeowners to refinance their mortgages at lower interest rates, and in addition cash-out equity based on increase in home prices without penalties.
The above practice was also supported by the deductibility of the interest paid on home equity loans from individual tax returns. This of course encouraged homeowners to go for a home equity loan, instead of credit cards or traditional loans when making major household purchases.
Instead of seeing their homes as a place to live, homeowners saw their abode as accounts to withdraw from or borrow against to make purchases. Unfortunately, this meant that when house prices collapsed homeowners found themselves in a negative equity situation with their homes. Simply put they owed more than their houses were worth.
This made it easy for homeowners to walk away from their mortgages. Further exacerbating this willingness to walk away from their bad mortgages was the leeway provided by State Laws in most States. Most States allowed the so called “without recourse mortgages” that allowed defaulting owners to escape the personal responsibility of paying the difference between their home’s value and the amount they originally borrowed from the Banks.
If we’ve learned anything from the Housing burst, it’s that Government policies were a catalyst that encouraged other players to run the system aground. Certainly predatory lenders, greedy brokers and irresponsible borrowers and lenders all played their parts in the housing collapse. However, government policies like the CRA and the government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac, which buy loans from the banks in order to provide liquidity setup the fertile ground for this abuse.
What can the government do to prevent a reoccurrence of this kind of crisis in the future?
If there is anything for the government to learn from this;-- it should allow market mechanisms to operate rather than enacting regulatory mandates like the CRA that pose political risks to financial markets.
Tools for fair, antidiscrimination, and effective housing policy should do NO MORE than to ensure that borrowers are not turned away for non-financial reasons.
Government policies that distort mortgage lending should be terminated in order for the markets to function efficiently whilst measuring risks and maintaining profitability.
Continued government intervention in the financial system will do nothing but continue this subversion of capitalism.
Ofuoma Odje
Monday, April 27, 2009
Saturday, April 18, 2009
Ofuoma Odje blogs about recent earnings from the Financials
Should the Banks be believed?
Since the DOW and the S&P touched 12 year lows of 6763 and 666 respectively in early March 2009, the stock market has rallied by approximately 20%. The move has been fueled mainly by the Financials.
So what has changed since the massive shock of the September 2008 Financial Crisis?
A few Banks like Citibank, Bank of America and JP Morgan have all come out to say they made money in first 2 months of 2009. These claims of course spearheaded the current rally in the Financials and the broader market.
However, taking a closer look at these claims and insinuations, one could ask how Banks that were deemed insolvent only a few months ago have suddenly returned to profitability with overwhelming alacrity.
Recent earnings reports from Goldman Sachs, JP Morgan Chase, Citibank and a preview Wells Fargo’s numbers have all been better than expected and have resulted in the Financials rallying higher and higher.
So how could so many investors be so wrong a few months ago when they sold banks into multi year lows?
Or could they have been right anyway?
Let’s look at some key economic indicators between the months of September 2008 and March 2009, a climate where these Banks have claimed to make such remarkable profits.
First of all, nearly 2.6 million jobs were lost in 2008 alone, with another 1.9 million more lost in the first quarter of 2009. To be quite specific, let’s look some headlines of the Government’s Job Reports between the months of September 2008 and March 2009.
---159,000 Jobs Lost in September 2008, the Worst Month in Five Years
---240,000 jobs lost in the US in October 2008
---The nation’s employers cut 533,000 jobs in November worst in a generation
--- The U.S. economy lost 524,000 jobs in December, the 12th straight month of decline.
---Employers slashed 598,000 more jobs in January as unemployment rate climbed to 7.6%.
---651,000 US Jobs Lost in February; Unemployment Rate Now at 8.1%
---US jobs lost in March 2009 totaled 663,000; Unemployment Rate Now at 8.5%
Add to this the wave of foreclosures and bankruptcies filed by individuals, corporations and institutions, and you will get a clear picture of a depression at the least.
Examples are all around us. Household names like Linen and Things, Circuit City and Sharper Image are now history thanks to the financial crisis.
Only last week Mall Operator GEN GROWTH PROP INC (GGP) filed for bankruptcy protection sparking concerns about new wave of trouble in commercial real estate.
So how did these Banks manage to net outstanding profits in this same time period? No one can say for sure but we can speculate.
We know that these Banks received TARP Money from the Federal Reserve so that is not in question.
What’s in question however, is that the direct TARP money the banks received could not by itself have resulted in these earnings.
AIG might well be the answer to this mystery. Since the beginning of this financial crisis, the over-leveraged AIG has received more than $170 Billion in Taxpayer money to satisfy debts caused by the collateralized debt obligations, credit default swaps and other similar financial instruments it underwrote prior to the September 2008 financial crisis.
The Washington Post Disclosed some US and foreign Banks and entities that received some $85 Billion of this Bailout money.
You can read more by visiting the url below.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/15/AR2009031501909.html
It is quite clear that US Taxpayer money went to bailout U.S and other Foreign Banks and financial institutions hence we have seen healthy earnings from some of these institutions.
If this is indeed the case behind these profits, then we can say they were nothing more than a transfer of money from U.S taxpayers to banks, with AIG acting as the go-between.
AIG however, is potentially still on the hook for several hundred billions more, should certain defaults occur on financial instruments it has underwritten
This could mean that second quarter earnings for these banks would be anything but as rosy as these first quarter shows, unless Bailout Nation continues to expand and congress approves more bailout money after a well anticipated mighty political battle on Capitol hill.
With the TARP running low on funds and the Government refusing to say how much is left, could it be that the U.S Taxpayer is on the hook for a few hundred billion bucks more in bailout money?
Or could this really mean that we would see another decline in the financials as second quarter earnings paint a grim picture?
We surely will find out between now and the end of the 2nd quarter of 2009, at least as far as the Banks and financials are concerned.
Ofuoma Odje
Since the DOW and the S&P touched 12 year lows of 6763 and 666 respectively in early March 2009, the stock market has rallied by approximately 20%. The move has been fueled mainly by the Financials.
So what has changed since the massive shock of the September 2008 Financial Crisis?
A few Banks like Citibank, Bank of America and JP Morgan have all come out to say they made money in first 2 months of 2009. These claims of course spearheaded the current rally in the Financials and the broader market.
However, taking a closer look at these claims and insinuations, one could ask how Banks that were deemed insolvent only a few months ago have suddenly returned to profitability with overwhelming alacrity.
Recent earnings reports from Goldman Sachs, JP Morgan Chase, Citibank and a preview Wells Fargo’s numbers have all been better than expected and have resulted in the Financials rallying higher and higher.
So how could so many investors be so wrong a few months ago when they sold banks into multi year lows?
Or could they have been right anyway?
Let’s look at some key economic indicators between the months of September 2008 and March 2009, a climate where these Banks have claimed to make such remarkable profits.
First of all, nearly 2.6 million jobs were lost in 2008 alone, with another 1.9 million more lost in the first quarter of 2009. To be quite specific, let’s look some headlines of the Government’s Job Reports between the months of September 2008 and March 2009.
---159,000 Jobs Lost in September 2008, the Worst Month in Five Years
---240,000 jobs lost in the US in October 2008
---The nation’s employers cut 533,000 jobs in November worst in a generation
--- The U.S. economy lost 524,000 jobs in December, the 12th straight month of decline.
---Employers slashed 598,000 more jobs in January as unemployment rate climbed to 7.6%.
---651,000 US Jobs Lost in February; Unemployment Rate Now at 8.1%
---US jobs lost in March 2009 totaled 663,000; Unemployment Rate Now at 8.5%
Add to this the wave of foreclosures and bankruptcies filed by individuals, corporations and institutions, and you will get a clear picture of a depression at the least.
Examples are all around us. Household names like Linen and Things, Circuit City and Sharper Image are now history thanks to the financial crisis.
Only last week Mall Operator GEN GROWTH PROP INC (GGP) filed for bankruptcy protection sparking concerns about new wave of trouble in commercial real estate.
So how did these Banks manage to net outstanding profits in this same time period? No one can say for sure but we can speculate.
We know that these Banks received TARP Money from the Federal Reserve so that is not in question.
What’s in question however, is that the direct TARP money the banks received could not by itself have resulted in these earnings.
AIG might well be the answer to this mystery. Since the beginning of this financial crisis, the over-leveraged AIG has received more than $170 Billion in Taxpayer money to satisfy debts caused by the collateralized debt obligations, credit default swaps and other similar financial instruments it underwrote prior to the September 2008 financial crisis.
The Washington Post Disclosed some US and foreign Banks and entities that received some $85 Billion of this Bailout money.
You can read more by visiting the url below.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/15/AR2009031501909.html
It is quite clear that US Taxpayer money went to bailout U.S and other Foreign Banks and financial institutions hence we have seen healthy earnings from some of these institutions.
If this is indeed the case behind these profits, then we can say they were nothing more than a transfer of money from U.S taxpayers to banks, with AIG acting as the go-between.
AIG however, is potentially still on the hook for several hundred billions more, should certain defaults occur on financial instruments it has underwritten
This could mean that second quarter earnings for these banks would be anything but as rosy as these first quarter shows, unless Bailout Nation continues to expand and congress approves more bailout money after a well anticipated mighty political battle on Capitol hill.
With the TARP running low on funds and the Government refusing to say how much is left, could it be that the U.S Taxpayer is on the hook for a few hundred billion bucks more in bailout money?
Or could this really mean that we would see another decline in the financials as second quarter earnings paint a grim picture?
We surely will find out between now and the end of the 2nd quarter of 2009, at least as far as the Banks and financials are concerned.
Ofuoma Odje
Wednesday, April 15, 2009
Ofuoma Odje on Business Journalism
Is business journalism now a blend of political and business Reporting?
by Ofuoma Odje
Long ago Business journalism used to be about Walls Street, stocks, businesses, finance, entrepreneurs and so on.
Business journalism today however seems to be a blend of Washington, Capitol Hill, Politicians, Legislation and many other socio-political issues along with core business reporting.
It appears that September 2008 collapse of the Global Financial System along with the recent worldwide recession is redefining Systemic Financial Procedures, consumer sentiment/spending, Lending and Borrowing practices, as well as Business Journalism.
One example was the recent frenzy about bailout nation. Main Street has been furious about the Fed’s actions that was seen by many as mortgaging the future of all Americans to bailout major Financial Institutions that have been irresponsible in conducting their business.
Many argue that these institutions should have been allowed to fail even if it meant the collapse of Capitalism and that those institutions left standing after the collapse should have been allowed to benefit from the demise of these failed institutions.
There has also been the auto crisis. With GM and Chrysler on the verge of Bankruptcy and Ford struggling to stay healthy, many have questioned why the Government should throw good money after bad money.
Both the Bailout of the Financial Institutions and the Auto Crisis were hot button topics during the 2008 Presidential Elections.
Mainstream business media including the likes of CNBC and Bloomberg have been caught in the middle of business and political reporting. They often interview politicians on business shows/airtime who sometimes have no business background or full understanding of the subject matter in play but are influential in passing important legislation that would impact the business community.
They also report on the behavior of these politicians and how they sometimes base their vote on legislation that impact the economy on pure political and main street sentiment, even when those sentiments are not in the best interest of the economy.
Then there are the politicians who are lobbied by Walls Street with cash and gifts to influence how they vote on legislation.
Many argue that the 2008 collapse of the Global Financial System has permanently scarred Capitalism forever, and that trust would almost never be wholly restored.
As for Business Journalism, one could also argue that it would never be strictly about business, finance and the markets from this point on.
Ofuoma Odje
by Ofuoma Odje
Long ago Business journalism used to be about Walls Street, stocks, businesses, finance, entrepreneurs and so on.
Business journalism today however seems to be a blend of Washington, Capitol Hill, Politicians, Legislation and many other socio-political issues along with core business reporting.
It appears that September 2008 collapse of the Global Financial System along with the recent worldwide recession is redefining Systemic Financial Procedures, consumer sentiment/spending, Lending and Borrowing practices, as well as Business Journalism.
One example was the recent frenzy about bailout nation. Main Street has been furious about the Fed’s actions that was seen by many as mortgaging the future of all Americans to bailout major Financial Institutions that have been irresponsible in conducting their business.
Many argue that these institutions should have been allowed to fail even if it meant the collapse of Capitalism and that those institutions left standing after the collapse should have been allowed to benefit from the demise of these failed institutions.
There has also been the auto crisis. With GM and Chrysler on the verge of Bankruptcy and Ford struggling to stay healthy, many have questioned why the Government should throw good money after bad money.
Both the Bailout of the Financial Institutions and the Auto Crisis were hot button topics during the 2008 Presidential Elections.
Mainstream business media including the likes of CNBC and Bloomberg have been caught in the middle of business and political reporting. They often interview politicians on business shows/airtime who sometimes have no business background or full understanding of the subject matter in play but are influential in passing important legislation that would impact the business community.
They also report on the behavior of these politicians and how they sometimes base their vote on legislation that impact the economy on pure political and main street sentiment, even when those sentiments are not in the best interest of the economy.
Then there are the politicians who are lobbied by Walls Street with cash and gifts to influence how they vote on legislation.
Many argue that the 2008 collapse of the Global Financial System has permanently scarred Capitalism forever, and that trust would almost never be wholly restored.
As for Business Journalism, one could also argue that it would never be strictly about business, finance and the markets from this point on.
Ofuoma Odje
Monday, April 13, 2009
Ofuoma Odje on President Barack Obama's healthcare plan
Ofuoma Odje on Barack Obama’s Universal Healthcare Plan
Universal health care is a Government sponsored system for the healthcare of all its residents regardless of their medical condition or financial status. Is this feasible America? And is it the best for American Businesses?
As the push for the Barack Obama proposed Universal Healthcare heats up on Capitol Hill many argue about the merits and demerits of a Universal Healthcare system.
Experts estimate Americans without Healthcare insurance to be as many as 47 million. At the same time, Healthcare spending in the United States account for about 15% of its GDP, the highest in any industrialized nation.
Nationalized healthcare models are being used in Countries like Canada and Great Britain and residents of those countries are fully covered by the State. There are questions however, about the quality of healthcare services received under those models.
Perhaps we couldn’t make an argument as to whether the health insurance based model being used in the U.S today would have also proven successful in Canada and in the UK or other European Countries because they never adopted such a model in the first place.
Good or bad we must critique the whole idea of a nationalized healthcare system in the U.S. There are arguments ranging from the insinuation that the Government is no good at running anything and that the current U.S healthcare system is the best in the world and should not be tinkered with by the Government, to arguments that Healthcare coverage is a right to U.S citizens and residents rather than a privilege as it is today.
It would seem that a good place to start is to find out who stands to gain the most and who stands to loose the most from a nationalized healthcare system.
The increasing cost of employee Healthcare in U.S is a cause of a lot of concern in Corporate America and many Executives are speaking out about the impact on earnings and the ability of U.S businesses to remain competitive on a Global scale whilst carrying this burden. Employees have also expressed concerns about the rising cost of their share of health insurance premiums.
Major U.S Employers like Wal-Mart and General Mills have been some of the recent proponents of Universal Healthcare that have argued that the current Health Insurance Model is simply unsustainable going forward.
There is little doubt that the Barack Obama Universal Healthcare plan cannot take off without broad reforms and enactment of regulations to govern the provision of health coverage by large healthcare companies.
This raises the first question which is:- How can we include an estimated 40% of the population and reduce Healthcare costs by over 60% at the same time?
Even if there are efficiencies to be realized from restructuring the existing system, it is still somewhat baffling to imagine the credibility of this proposition without having the taxpayer on the hook for a very significant portion of the bill. One could even argue that Healthcare giants like Aetna and United Health Care could not remain profitable without huge taxpayer subsidies.
One key point to note is that companies like Aetna and United Health will effectively see the demise of their HMO business as those who currently have coverage would make changes to their plans in order to take advantage of Barack Obama Universal Healthcare plan.
Who are the winners and losers?
A good question though, is who actually benefits from Universal Healthcare? It is hard to be definite today, but one could argue that Generic Drug makers and Hospitals would be winners right off the wall.
Corporate America would be another big winner as the burden of Managed Employee Healthcare is lifted off its shoulders. In addition, the estimated uninsured 47 million Americans would also be winners under this scenario.
While big Pharma would take a hit because of Government pressure on drug pricing, those who do well with producing hard-to-make generic drugs should experience lower development risk.
However, Government pressure on drug pricing could hamper research and development of new drugs or result in U.S. Pharmaceutical Companies relocating abroad to countries with more favorable business environments; taking away U.S jobs in some cases.
Companies like Aetna and United Health would not be as fortunate because their HMO business will be completely wiped out by the Barack Obama Universal Healthcare plan, and if there are no taxpayer subsidies these companies will see a decline in earnings.
The Politics
The Barack Obama proposed Universal Healthcare Plan would be a success if there is no money to be made in the decision making process of enacting the Universal Healthcare Plan.
It is no news that big business is in bed with Lawmakers and Politicians. Therefore we must expect serious lobbying of Lawmakers and Politicians by large Healthcare institutions that stand to gain or loose from Universal Healthcare.
This kind of lobbying however, if allowed, will get in the way of getting the peoples business done. The result could mean that Universal Healthcare would be held up in both houses of congress and never get enacted in Barack Obama’s first term. Even worse we could see a compromised mediocre version of Universal Healthcare passed by the House and Senate after falling victim to lobbying by big business interests.
The Bottom-line
Universal Healthcare may well not be feasible in America for the sheer reason that it’s a socialist concept that goes against the very tenets of Capitalism on which the American society was established.
Simply put, it is un-American to propose the use of taxpayers’ money to pay for the Healthcare of those who do not contribute to the economy.
On the flip side, one could take a long shot and make an argument that Healthcare is a constitutional right of all Americans. In the face of this kind of argument, Universal Healthcare could stand a chance.
Ofuoma Odje
Universal health care is a Government sponsored system for the healthcare of all its residents regardless of their medical condition or financial status. Is this feasible America? And is it the best for American Businesses?
As the push for the Barack Obama proposed Universal Healthcare heats up on Capitol Hill many argue about the merits and demerits of a Universal Healthcare system.
Experts estimate Americans without Healthcare insurance to be as many as 47 million. At the same time, Healthcare spending in the United States account for about 15% of its GDP, the highest in any industrialized nation.
Nationalized healthcare models are being used in Countries like Canada and Great Britain and residents of those countries are fully covered by the State. There are questions however, about the quality of healthcare services received under those models.
Perhaps we couldn’t make an argument as to whether the health insurance based model being used in the U.S today would have also proven successful in Canada and in the UK or other European Countries because they never adopted such a model in the first place.
Good or bad we must critique the whole idea of a nationalized healthcare system in the U.S. There are arguments ranging from the insinuation that the Government is no good at running anything and that the current U.S healthcare system is the best in the world and should not be tinkered with by the Government, to arguments that Healthcare coverage is a right to U.S citizens and residents rather than a privilege as it is today.
It would seem that a good place to start is to find out who stands to gain the most and who stands to loose the most from a nationalized healthcare system.
The increasing cost of employee Healthcare in U.S is a cause of a lot of concern in Corporate America and many Executives are speaking out about the impact on earnings and the ability of U.S businesses to remain competitive on a Global scale whilst carrying this burden. Employees have also expressed concerns about the rising cost of their share of health insurance premiums.
Major U.S Employers like Wal-Mart and General Mills have been some of the recent proponents of Universal Healthcare that have argued that the current Health Insurance Model is simply unsustainable going forward.
There is little doubt that the Barack Obama Universal Healthcare plan cannot take off without broad reforms and enactment of regulations to govern the provision of health coverage by large healthcare companies.
This raises the first question which is:- How can we include an estimated 40% of the population and reduce Healthcare costs by over 60% at the same time?
Even if there are efficiencies to be realized from restructuring the existing system, it is still somewhat baffling to imagine the credibility of this proposition without having the taxpayer on the hook for a very significant portion of the bill. One could even argue that Healthcare giants like Aetna and United Health Care could not remain profitable without huge taxpayer subsidies.
One key point to note is that companies like Aetna and United Health will effectively see the demise of their HMO business as those who currently have coverage would make changes to their plans in order to take advantage of Barack Obama Universal Healthcare plan.
Who are the winners and losers?
A good question though, is who actually benefits from Universal Healthcare? It is hard to be definite today, but one could argue that Generic Drug makers and Hospitals would be winners right off the wall.
Corporate America would be another big winner as the burden of Managed Employee Healthcare is lifted off its shoulders. In addition, the estimated uninsured 47 million Americans would also be winners under this scenario.
While big Pharma would take a hit because of Government pressure on drug pricing, those who do well with producing hard-to-make generic drugs should experience lower development risk.
However, Government pressure on drug pricing could hamper research and development of new drugs or result in U.S. Pharmaceutical Companies relocating abroad to countries with more favorable business environments; taking away U.S jobs in some cases.
Companies like Aetna and United Health would not be as fortunate because their HMO business will be completely wiped out by the Barack Obama Universal Healthcare plan, and if there are no taxpayer subsidies these companies will see a decline in earnings.
The Politics
The Barack Obama proposed Universal Healthcare Plan would be a success if there is no money to be made in the decision making process of enacting the Universal Healthcare Plan.
It is no news that big business is in bed with Lawmakers and Politicians. Therefore we must expect serious lobbying of Lawmakers and Politicians by large Healthcare institutions that stand to gain or loose from Universal Healthcare.
This kind of lobbying however, if allowed, will get in the way of getting the peoples business done. The result could mean that Universal Healthcare would be held up in both houses of congress and never get enacted in Barack Obama’s first term. Even worse we could see a compromised mediocre version of Universal Healthcare passed by the House and Senate after falling victim to lobbying by big business interests.
The Bottom-line
Universal Healthcare may well not be feasible in America for the sheer reason that it’s a socialist concept that goes against the very tenets of Capitalism on which the American society was established.
Simply put, it is un-American to propose the use of taxpayers’ money to pay for the Healthcare of those who do not contribute to the economy.
On the flip side, one could take a long shot and make an argument that Healthcare is a constitutional right of all Americans. In the face of this kind of argument, Universal Healthcare could stand a chance.
Ofuoma Odje
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