Stratfor’s George Friedman turns his non-ideological strategic lens on the mortgage crisis, and argues for following the model used in the Savings & Loan crisis of 1989.

Financial meltdowns based on shifts in real estate prices are not new. In the 1970s, regulations on savings and loans (S&Ls) had changed. Previously, S&Ls had been limited to lending in the consumer market, primarily in mortgages for homes. But the regulations shifted, and they became allowed to invest more broadly. The assets of these small banks, of which there were thousands, were attractive in that they were a pool of cash available for investment. The S&Ls subsequently went into commercial real estate, sometimes with their old management, sometimes with new management who had bought them, as their depositors no longer held them.

The infusion of money from the S&Ls drove up the price of commercial real estate, which the institutions regarded as stable and conservative investments, not unlike private homes. They did not take into account that their presence in the market was driving up the price of commercial real estate irrationally, however, or that commercial real estate prices fluctuate dramatically. As commercial real estate values started to fall, the assets of the S&Ls contracted until most failed. An entire sector of the financial system simply imploded, crushing shareholders and threatening a massive liquidity crisis. By the late 1980s, the entire sector had melted down, and in 1989 the federal government intervened.

The federal government intervened in that crisis as it had in several crises large and small since 1929. Using the resources at its disposal, the federal government took over failed S&Ls and their real estate investments, creating the Resolution Trust Corp. (RTC). The amount of assets acquired was about $394 billion dollars in 1989 — or 6.7 percent of gross domestic product (GDP) — making it larger than the $700 billion dollars — or 5 percent of GDP — being discussed now. Rather than flooding the markets with foreclosed commercial property, creating havoc in the market and further destroying assets, the RTC held the commercial properties off the market, maintaining their price artificially. They then sold off the foreclosed properties in a multiyear sequence that recovered much of what had been spent acquiring the properties. More important, it prevented the decline in commercial real estate from accelerating and creating liquidity crises throughout the entire economy.

Andrew By God Jackson

Rich Hills at Prawfsblog hears in the House vote rejecting the Wall Street Bailout, echoing down the corridors of time, the ancient American political conflict between the Northeastern monied interests desiring federal control and manipulation of the economy in their service and the libertarianism of Jefferson and Andrew Jackson.

In the wake of the House of Representative’s rejection of Paulson’s bailout measure, I cannot help but think that the spirit of Andrew Jackson lingers among America’s electorate. The rhetoric among members of Congress, op-eds, blogs, all sound suspiciously similar to Jackson’s message accompanying his veto of the renewal of the Bank of the United States’ charter. Henry Paulson seems to be our latter-day Nicholas Biddle. The investment banks now holding mortgage-backed securities play the role of the bank of the United States. One does even need to edit the current attacks on banks, eastern capital, government aid to private corporations to put these contemporary messages into the mouths of Jackson, Amos Kendall, and the other “hard money” Jacksonians who decried the “exclusive privileges” of the “rich and powerful” shareholders of the “monster bank.”

Read the whole thing.

Victor Davis Hanson wonders if the hour’s need will produce a man who can lead.

The stage is set for someone to play Washington, Lincoln, or Churchill. An entire generation of leadership is failing, as the world watches aghast.

ACORN protester

Mona Charen highlights the special place of community organizers in the current crisis: they had a lot to do with causing it, and they may well yet still reap yet more power and money as the result.

The financial markets were teetering on the edge of an abyss last week. The secretary of the Treasury was literally on his knees begging the speaker of the House not to sabotage the bailout bill. The crash of falling banks made the earth tremble. The Republican presidential candidate suspended his campaign to deal with the crisis. And amid all this, the Democrats in Congress managed to find time to slip language into the bailout legislation that would provide a dandy little slush fund for ACORN.

ACORN stands for the Association of Community Organizations for Reform Now, a busy hive of left-wing agitation and “direct action” that claims chapters in 50 cities and 100,000 dues-paying members. ACORN is where Sixties leftovers who couldn’t get tenure at universities wound up. That the bill-writing Democrats remembered their pet clients during such an emergency speaks volumes. This attempted gift to ACORN (stripped out of the bill after outraged howls from Republicans) demonstrates how little Democrats understand about what caused the mess we’re in.

ACORN does many things under the umbrella of “community organizing.” They agitate for higher minimum wages, attempt to thwart school reform, try to unionize welfare workers (that is, those welfare recipients who are obliged to work in exchange for benefits) and organize voter registration efforts (always for Democrats, of course). Because they are on the side of righteousness and justice, they aren’t especially fastidious about their methods. In 2006, for example, ACORN registered 1,800 new voters in Washington. The only trouble was, with the exception of six, all of the names submitted were fake. The secretary of state called it the “worst case of election fraud in our state’s history. …

ACORN recognized very early the opportunity presented by the Community Reinvestment Act (CRA) of 1977. As Stanley Kurtz has reported, ACORN proudly touted “affirmative action” lending and pressured banks to make subprime loans. Madeline Talbott, a Chicago ACORN leader, boasted of “dragging banks kicking and screaming” into dubious loans. And, as Sol Stern reported in City Journal, ACORN also found a remunerative niche as an “advisor” to banks seeking regulatory approval. “Thus we have J.P. Morgan & Co., the legatee of the man who once symbolized for many all that was supposedly evil about American capitalism, suddenly donating hundreds of thousands of dollars to ACORN.” Is this a great country or what? As conservative community activist Robert Woodson put it, “The same corporations that pay ransom to Jesse Jackson and Al Sharpton pay ransom to ACORN.”

ACORN attracted Barack Obama in his youthful community organizing days. Madeline Talbott hired him to train her staff — the very people who would later descend on Chicago’s banks as CRA shakedown artists. The Democratic nominee later funneled money to the group through the Woods Fund, on whose board he sat, and through the Chicago Annenberg Challenge, ditto. Obama was not just sympathetic — he was an ACORN fellow traveler.

Now you could make the case that before 2008, well-intentioned people were simply unaware of what their agitation on behalf of non-credit-worthy borrowers could lead to. But now? With the whole financial world and possibly the world economy trembling and cracking like a cement building in an earthquake, Democrats continue to try to fund their friends at ACORN? And, unashamed, they then trot out to the TV cameras to declare “the party is over” for Wall Street (Nancy Pelosi)? The party should be over for the Democrats who brought us to this pass. If Obama wins, it means hiring an arsonist to fight a fire.

A 9:59 video look at the mortgage meltdown’s roots.

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9/29: 6:00 PM EDT:

I would expect the video to be back (with the offending song removed) before very long.

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Back up 9:45 PM EDT:

new link

Why did mortgage lenders start making all those high risk loans? Stanley Kurtz explains that the radical left successfully combined agitation with official federal policy to make them do exactly that.

What exactly does a “community organizer” do? Barack Obama’s rise has left many Americans asking themselves that question. Here’s a big part of the answer: Community organizers intimidate banks into making high-risk loans to customers with poor credit.

In the name of fairness to minorities, community organizers occupy private offices, chant inside bank lobbies, and confront executives at their homes – and thereby force financial institutions to direct hundreds of millions of dollars in mortgages to low-credit customers.

In other words, community organizers help to undermine the US economy by pushing the banking system into a sinkhole of bad loans. And Obama has spent years training and funding the organizers who do it.

Read the whole thing.

A slideshow presentation by a ’07 Yale grad who recently had the job of a lifetime at Lehman.

link

Hat tip to Stormin’ Norman.

Reason poses the following three questions to ten free market economists.

1. How bad is the current market situation?

3. What’s the one thing we should be doing that we’re not?

BBSpot has the story:

Nigerian philanthropic billionaire Esenam Ayele said that he would make $80 billion dollars available to US banks from his accounts in Nigeria. All he needed to transfer the funds was a trusted associate at the bank.

It couldn’t come at a better time for Wall Street as the bankruptcy of Lehman Brothers, the sale of Merrill Lynch and government bailout of AIG has left markets tumbling with no bottom in site. The guaranteed funds should bring some stability back to financial institutions.

Treasury Secretary Hank Paulson said Ayele could be trusted. “I know he’s had problems in the past with people believing him, but I assured the folks over at Washington Mutual that he was for real.”

Ayele, who has returned to wealth with the rise in oil prices, said from his palace in Lagos, “I just need someone to fax me a copy of the transfer codes on some bank stationery, and I’ll get the money right over.”

He added that his widowed sister also had more funds she could transfer out of the country which she inherited from Prince Ugube of Tanzania. “She just as helpful as I am, but she’s unable to come to the United States because of a visa issue. If somebody could just send her a cashier’s check for $1000, she’ll be able to clear everything up and transfer the funds.”

The American government would rather have private funds involved as to not create the appearance that taxpayers will rescue every bank from dumb mistakes.

“I’m glad I can be of service,” said Ayele. “The American people have done so much for me. I’m thankful to return the favor.”

The Dow Jones Industrial Average was down 1,458 points on the news.

New York Magazine describes what it’s like for Manhattan’s financial elite when the music suddenly stops.

The Trader had come to Lehman only a year ago, after being recruited from a rival firm. He’d studied physics as a grad student, then come to Wall Street as the tech bubble and the aggressive gentrification of the Giuliani years remade Manhattan into a banker’s playground, a place where a $2 million salary could seem like the norm.

Like many on Wall Street, the Trader’s career was moving along briskly. By 2006, he had settled into a new $2 million house in Connecticut with a pool, and kept a pied-à-terre in Manhattan. With two young children, he had private-school tuition to cover. He had recently completed a home renovation, and now there was talk of a new porch with a built-in stainless-steel barbecue. The Trader estimated that he was two years from making enough money to retire and never have to work again.

By Saturday, September 13, Lehman Brothers teetered on the precipice of bankruptcy after Barclays and Bank of America walked away from a deal. The Trader was certain of little, except that he was a lot poorer. The unvested stock from his previous year’s bonus, once worth $3 million, was now reduced to a scant $6,000. And on Wall Street, self-worth and net worth can amount to the same thing. “The hardest thing in my mind is to have your compensation cut,” a veteran Wall Street executive says. “It’s almost like you’re a bad person.”

At a dinner party in Darien that evening, the conversation was a mix of denial and panic. An executive from UBS lamented what the Lehman meltdown would mean for Wall Street. “This is going to be a disaster,” the executive said. The executive’s wife nervously tried to steer the topic toward lighter subjects. She kept talking about summer vacation. And then she turned to the Trader and asked, “What do you do?”

The collapse of the world’s most powerful wealth-creating engine required everyone to take stock of their financials. One Lehman executive in Rye Brook, fretting about paying off a Hamptons summer house and a ski chalet in Vermont, panicked on Monday morning and laid off her nanny, who had been with the Westchester family for nine years. “The nanny called me crying,” says Marla Sanders, who runs Advance Nannies and staffs Lehman homes. “One of the children she had brought home from the hospital.” Sanders knows more cuts for her clients are on the way. “They’re going to have to sell homes. The question is, will the homes sell? They’re cutting some of the children’s activities out, dance class, acting class. Are they going to have flowers delivered every day to their homes? I don’t think so!”

John Steele Gordon identifies the guilty parties behind the Fannie Mae-Freddie Mac collapse.

At the heart of the problem is Congress and its deeply corrupt relationship with Fannie Mae and Freddie Mac. Congress was equally at the heart of the savings and loan disaster 20 years ago and, obviously, learned nothing from it. (For a history of what led to the savings and loan collapse, see here.)

Fannie and Freddie, two of the largest publicly traded financial institutions on earth, are headquartered in Washington, D.C., where the next-largest non-governmental financial institution is probably a local credit union. Big financial companies are headquartered in New York and other cities where capitalism is practiced. That should tell you a lot about Freddie and Fannie: they were political to their fingertips.

Being “government sponsored entities,” they were able to borrow at lower interest rates than other profit-seeking companies, had less regulation, had lower capital requirements, and had an “implied” guarantee on their huge debts. This was supposed to translate into more money available for mortgages, but was used instead to roll up big profits and, not so incidentally, big bonuses for their top management — which came not from the financial world but from the political one.

Franklin Raines, Fannie C.E.O. from 1999 to 2004, had been budget director in the Clinton White House. He cooked the books at Fannie to increase his compensation (more than $50 million). Jamie Gorelick, vice C.E.O., was number two at the Clinton Justice Department before going to Fannie Mae. She made $26 million. Jim Johnson, a perennial Washington big-foot, was chairman from 1991 to 1998. He too, according to an official government report, cooked the books to increase his compensation and failed to publicly reveal how much he received.

The Wall Street Journal editorial page has been giving chapter and verse for years on why this was a disaster waiting to happen (Pulitzer Prize judges, please note). The Bush administration tried way back in 2003 to change the system. It got nowhere. Alan Greenspan, then the chairman of the Federal Reserve, frequently noted the danger of Fannie and Freddie’s weak capitalization. He was ignored. Congressman Mike Oxley, then chairman of the House Financial Services Committee, introduced a bill in 2005 to correct the situation. Lobbyists from Fannie and Freddie succeeded in gutting it to the point that Rep. Oxley pulled the bill.

Why were Fannie and Freddie so successful at maintaining the status quo? Check it out.

Senator Chris Dodd — formerly ranking member and now chairman of the Senate Banking Committee, with oversight over Freddie and Fannie — recently said on Bloomberg Television: “I have a lot of questions about where was the administration over the last eight years.”

Excuse me? Just where the hell were you, Senator? Oh, right. You were standing in line at the bank in order to deposit the political contributions Fannie and Freddie were lavishing upon you. At least they got their money’s worth — until the party ended and the American people got the bill.

Members of Congress — aided and abetted by their many waterbearers in the media — wonder why their collective approval rating is about on par with colon cancer’s. The reason is simple enough: Congress is the sick man of Washington; a textbook example of the truism that institutions tend to evolve in ways that benefit their elites, at the expense of the people they were created to serve.

Obama’s bump in the polls derived from the financial market’s meltdown is perfectly in accord with the tradition of radical leftist agitation in which his philosophy and political career are rooted, Bruce Walker explains at American Thinker.

Obama seems happier these days. It is almost as if the disembodied spirit of his mentor, Saul Alinsky, is watching and smiling. Americans are suffering. Losses in the stock market, panic in the financial market, pain at the gas pump and in the grocery — all these miseries of average Americans are a delicious narcotic to socialists like Barack Obama.

What was the historic maxim of the Left? “The worse, the better.” Alinsky said that if there was an afterlife, “I will unreservedly choose to go to hell.” This is the man whose mind guides Obama’s thoughts.

Americans ought to ponder that before electing a man who thrives politically — the sphere of his life that really matter to him — on the unhappiness, helplessness, and hopelessness of his fellow citizens.

Read the whole thing.