Wednesday, December 05, 2007

Paulson Plan To Aid Subprime Borrowers Not Enough

Written from Berkeley, California--

The subprime mortgage crisis, which threatens that millions will lose their homes, that housing prices in general will fall drastically, that terrible losses will occur for financial institutions in the U.S. and abroad, and that the country may spin into a recession, cannot be resolved with halfway measures.

But that is exactly what we're getting in the form of proposals from Treasury Secretary Henry M. Paulson, Jr., and, in California, from Gov. Arnold Schwarzenegger. They are suggesting a program of relief for a minority of borrowers by suspending increases in their interest rates for a period of one to five years. As the New York Times reported yesterday, Barclays Capital has examined the plans and estimates they would cover only 12% of the borrowers. Millions of others would still be likely to fall into foreclosure.

This is what we have come to expect from the Bush Administration and the phony Schwarzenegger. (I've been reading Amy Wilentz's book about California, and I find it enlightening about just how phony a leader Schwarzenegger is).

(The New York Times is reporting today that Atty. Gen. Andrew Cuomo of New York has subpoenaed a number of Wall Street firms in an investigation of the packaging and selling of subprime mortgages -- certainly a constructive move).

(Later, there were reports that President Bush would announce a five-year moratorium on subprime loan interest rate increases for some loans taken out after 2005. There was no word yet as to how many borrowers would be covered).

It will be said by many that all mortgage rescue plans must be limited, because those who hold the securities growing out of the subprime mortgages cannot be expected to eat all their losses, if the rate increases that follow the initial teaser rates cannot be realized.

But (1) these investors will lose their shirts anyway, should the subprime loans go into default, and (2) there is no reason why those responsible for the crisis -- irresponsible elements of the finance community and inept government regulators -- should not bear a good share of the consequences of their own stupidity. greed and wrongdoing.

Who shall be protected in the present crisis as a first priority -- those who were foolish enough to borrow money they should have known they would not be able to repay, or those making the loans and hoodwinking many into thinking they were manna from heaven, or those buying the securities that are now valueless, because the loans they are backing are valueless?

I think there should be a compromise tending toward the borrowers -- one that limits the increases over a long period of time for a very large share of the people who took the loans.

Are financial institutions and investors in the securities going to take a hit if there is such a compromise? Of course, but this is not usual corporate America, where fools like Dennis FitzSimons, the ept CEO of the Tribune Co., can expect to walk away from their failures with huge golden parachutes.

No, here, someone is going to have to pay the piper. In any event, they should have known that when you make loans to poor credit risks and utterly insolvent people, without any regard to the likely consequences, then you are going to have to eat a large share, at least, of losses that occur.

Some will say this solution too may spin the economy into recession, since the denouement of it will dry up credit completely.

Perhaps for awhile. There is probably no easy way out of the crisis that irresponsibility of many financial elites and regulators has allowed us to get into.

But at least the poor and downtrodden would be aided, and there has been precious little of that in America now for some time. The Bush Administration has trillions of dollars for Iraq, but only paltry amounts for hurricane or lending victims.

The New York Times editorialized today, before reports that announcement of a plan by the Bush Administration was imminent, that, "Done properly, a broad brush loan modification could freeze the introductory rates on an estimated 500,000 loans. Investors who had been expecting returns based on higher rates would lose money. That is a tough break, but if most of the cost of foreclosure avoidance doesn't come from investors, it will come from taxpayers. And that would be a greater injustice. Investors in junk mortgages helped create the subprime mess. Now they have to help clean it up."

Meanwhile, a broad restructuring of the Federal Reserve Board is needed to be sure that its failure to protect the financial system cannot reoccur. Its present members should be replaced, and new ones, with new, broader regulatory powers, be installed.

The whole embroglio thankfully is now getting the attention it deserves throughout the nation's press. Maybe, casting more light on the scandal will assist eventually in the kind of revolutionary changes needed to resolve it.

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