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07.01.2008 0

Senate Subprime Subterfuge

  • On: 07/15/2008 11:42:16
  • In: Economy
  • Senate Democrats to Bail Out International Financial Industry

    The Senate Democrats are at it again, pretending to help out the little guy by padding the pockets of their favored interest groups, this time with the Foreclosure Prevention Act, a $4 billion direct subsidy to a non-general Treasury fund designed, according to Senator Richard Durbin (D-IL), to give “families every reasonable tool to ensure they can keep a roof over their heads instead of giving banks every opportunity to keep padding their line.” In reality, it’s to pull the wool over their eyes. The bill would in fact be a boon to those banks, because the Federal government would be donating funds to pay off the lenders who should have never given out these loans in the first place. This is sheer sub-prime subterfuge.

    The Senators were joined at the press conference by an Ohio family, and what their attorney had to say gets to the heart of what’s really going on here: “[The family’s] lender will receive more [money] than it will if the home were sold at foreclosure.” Obviously, when these banks were giving these home loans out, they were taking a risk, like any individual that makes an investment. And like everyone else in the real world, when they make a bad investment, they should incur the cost of doing so, not the American taxpayer.

    John Bird and John Fortune, British humorists, recently put it best on their UK show, The Last Laugh, in explaining the sub-prime mortgage crisis and what happened to the ill-fated mortgages that were taken out by Americans. John Bird plays the part of the investor who purchases bundled up loans on Wall Street:

    JB: “This debt, this mortgage…is taken, bought by a bank, and packaged together on Wall Street with a lot of other similar debts…”

    JF: “Without going into much detail about what is actually…”

    JB: “Without going into any detail. No, it’s far too boring… And then, somehow, this package of dodgy debts stops being a package of dodgy debts and starts being what we call a ‘structured investment vehicle.’” …

    JF: “Yes, I see, and then someone like you comes along and buys it.”

    JB: “I buy it, yes. And I will ring up, I don’t know, somebody in Tokyo, and say, ‘Look, I have this package, do you want to buy it?’ And they say, ‘What’s in it?’ And I say, ‘I haven’t got the faintest idea!’ And they say, ‘How much do you want for it?’ And I say, “$100 million.’ And they say, ‘Fine.’ That’s it. That’s the market.”

    In other words, these banks gave out the loans, and then turned around, bundled the loans, and sold them as securities. When those loans are not paid, those securities go into default. However, it should be the lender who pays the price for that, not the American taxpayer. Why should we have to bail out international banks that cannot properly assess risk?

    ALG Perspective:
    This bill would set up a terrible precedent of the Federal government paying off international lenders’ debts on bad investments. If the Congress tells these banks that they will be held “harmless” for their risky schemes, then we can only expect there to be more risky schemes in the future. This would be a Pavlovian payoff, with the Senate playing the role of Pavlov, the banks the role of the Big Dog, and the “treat” would be represented by the American taxpayers’ money. Basically, the Big Dog of international banking will learn very quickly that they can raid the taxpayers’ pantry every time the bells of foreclosure are rung.

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