Customer Reviews

$700 Billion Bailout: The Emergency Economic Stabilization Act and What It Means to You, Your Money, Your Mortgage and Your Taxes

5 star:		(4)
4 star:		(2)
3 star:		(0)
2 star:		(1)
1 star:		(1)

 

 

I read the book and was displeased with the author's assertions that the mortgage crisis was caused by Wall Street greed. Fannie Mae & Freddie Mac were largely exonerated in his book from any culpability other than the fact that they bought subprime mortgages from lenders without proper oversight as to the quality of the underlying loans. However, even in that assessment his states that Fannie & Freddie did so because the credit default swaps that backed up the mortgages insured them against default and were supposed to reduce the risk. To this extent, Moody's, S&P and Fitch were able give good ratings to poor quality loans because of the insurance backing by AIG and other companies involved in insuring credit risk. In short, Fannie & Freddie were victims of the subprime mess not catalysts for it. Also, the author completely ignores the biggest culprit in this calamity: the Federal Government.


What's wrong with the author's assessment? Here goes:

1. Why were subprime mortgages even offered in the first place? In 1977, President Carter signed into law the community reinvestment act which began to issue ratings, CRA ratings, based on how lending institutions issued loans to low-income areas. At face value, the act sounds good as it was believed that lenders discriminated against people of color. Lenders were not compelled to lower their lending standards to issue loans to minorities or high-risk areas (crime ridden low-income areas).
2. During the Clinton administration in the 1990s, the CRA ratings of lenders took on a new dimension. If the rating was not high-enough, the bank would not be authorized to open new branches, or merge or acquire other banks until the CRA rating increased. This effectively put force of law to the CRA rating and banks naturally began to view loans to otherwise (credit) unqualified people as a cost of doing business. Voila! You now have the subprime mortgage sector created.
3. In 1999, President Clinton signed into law allowing lending institutions the ability to securitize these mortgages and the SIV or structured investment vehicle was born. By 2001, SIVs were now responsible for billions in securitized mortgages. It was during the latter 90s and early 2000s that Wall Street greed now takes these products to the next level.
4. From 2001-2006 over two dozen legislative attempts were made by President Bush to toughen regulation of Fannie & Freddie given that they too held trillions in debt and were also securitizing the underlying loans and selling them profitably using their status as a GSE (government sponsored enterprise) to sell them abroad under the cloak of backing by the Federal Government. As early as 2001, President Bush stated that the trillions in poor-quality loans held by Fannie & Freddie had the ability to turn the economy into deep recession if defaults of those loans were to increase. Each substantive legislative attempt was thwarted by filibuster by the Democrats. Rep. Barnie Frank was Fannie/Freddie's #1 recipient of campaign cash - he now chairs the house banking committee. Sen. Chris Dodd was Fannie's #1 recipient of campaign cash - he now chairs the senate banking committee. Sen. Hillary Clinton was the #4 recipient. Sen. Obama was Fannie/Freddie's #2 recipient of campaign cash. In fact, the top recipients of Fannie/Freddie's immense political clout & cash were all democrats.
5. In 2004, Federal Reserve Chairman Alan Greenspan encouraged Fannie/Freddie to securitize their loans further because Credit Default Swaps (CDS) reduced the underlying risk.

This major problem was the result of government (Congress, Presidents, & Federal Reserve) interference which came as a result of their intention to implement "fairness" into the private sector. It is completely wrong of the author to blame Wall Street as if they operated in some sort of vacuum. This was the doing of the Federal Government.

Did the author mention any of the points I just now made? No, not one of them. He covers the $700 billion bailout in good detail but his huge omissions underline his bias: free pass to government & progressives responsible for this fiasco.

Lastly, the book is roughly 160+ pages long. The first 83 cover aspects of the $700 billion bailout and how it relates to us in the author's assessment. The remaining half of the book is a reprint of highlights of the bailout bill. He could have simply made that a PDF download or included a link to that on the internet. It was really a waste of paper and slight of hand to make the book appear to cover more detail than actually is covered.

Paul Muolo provides a clear and apparently fair and balanced explanation of how it would have been practically impossible for the Fannie Mae, Freddie Mac and the banks to inflate the housing bubble to such a monstrous size if Standard & Poor's, Moody's and Fitch hand not inflated their ratings on all those mortgage bonds. But how big is the bubble? On page 50 the author estimates that homes mainly in the southwest and Florida could lose 50 percent in value. What about the rest of the country? My own personal data (contained in my book "How to Invest in Condominiums") and experience in Seattle indicates that the problem is more widespread. A 50 percent estimate also applies to the Pacific North West if a longer time period is considered. In Seattle in the late 1970's you could buy new condominiums for a price that was about seven times the gross annual rent. I stopped buying real estate in the 1980's when I could not get a price close to my recommended target price of seven times the gross annual rent. The bubble was beginning to inflate. If millions of other real estate buyers had stopped buying because housing prices were getting outrageously high relative to imputed rents it is difficult to imagine how the bubble could have continued to grow.
Now the bubble has supposedly burst, but yet the minimum selling price at condominium auctions (and they do sell rapidly) are set at about fourteen (14) times the gross annual rent. Twice what was "normal" in the late 1970's. Seattle, of course, is not the whole country but almost everyday there are indications that the panic is getting bigger. Weeks ago the government thought they could stop the panic with a $750 billion injection of capital. This crisis is moving so fast that this book published in 2009 is rapidly getting out of date. Microsoft is laying of people (5000) for the first time in it's history. And now in senate hearings you hear the number $4 trillion to buy from the banks all the "toxic assets" (a scary label for over-priced real estate used in times of panic). Some economists worry that this massive amount of spending could totally destabilize the dollar. The Inauguration's main theme was hope. But the stock market responded with a crescendo of fear. It fell 332 points, the worst Inauguration Day sell off in 113 years.
I subtract one star for the fact that half the book is consists of "Excerpts from the Emergency Economic Stabilization Act of 2008" (page-count inflation) and there is no index.

Anyone having paid attention to the news before, during and after the financial meltdown in the fall of 2008 could easily prepare such a book. I found the book riddled with errors as Muolo/Wiley scrambled to get this book onto retail shelves within months of the meltdown - the first error was found in chapter 1. It was hard to take the book seriously after that.

The conclusions drawn by Muolo were minimal as the focus of the book was a recount of the events leading to, during and after the meltdown. I was unable to gain value added information on how this bailout would impact me and how to shield myself from future negative economic ramifications as a result. In my humble opinion, the content of this book does not adequately live up to the title (.."What It Means to You"...).

I was surprised to find that about half of the book is a reprint of the Act. I was looking for an executive summary of the bailout and did not want to read the boring legalese of the Act itself. Perhaps it was asking too much to have this laid out for me.

Additionally, I found explanations for financial terms touched merely the tip of the iceberg making it difficult for anyone not working in the financial world to fully understand the magnitude and pervasiveness of this crisis.

Needless to say, I was truly disappointed in this book. It just goes to show that haste really does make waste.

Most of the Emergency Economic Stabilization Act (EESA - $700 million) consists of 300 pages (out of a 451 page total) of tax breaks for businesses and consumers that have nothing to do with the mortgage and credit crisis. The act originated as a three-page memo, failed in the House on its first vote (110 pages then), and in its final version also gave the Treasury power to bail out counties, cities, pension funds, and foreign banks suffering increased costs or losses.

At the time that EESA was passed, there were $44 trillion of CDS outstanding - totally unregulated. The national delinquency rate for the $1 trillion in sub-prime mortgages is now about 35%; there are also about $400 billion in Alt-A, another $800 billion in home-equity loans, and an unreported amount of ARMs.

"Toxic" mortgages are believed to be worth, on average, about 60 cents on the dollar, with about 20 cents offered. (No explanation for the difference.) Muolo believes that total losses will run about $1 trillion, with only half recognized by holding entities so far.

Fannie Mae and Freddie Mac together own about 18% ($180 billion) of mortgage bonds backed by sub-prime loans, as well as $1.4 trillion in home mortgages, while guaranteeing still another $4.2 trillion.

TARP spent $250 billion to buy stakes in large, and small and mid-size banks (about half in each). Seven of the nine large banks didn't want to participate - it was done for psychological means to show that American banks are strong.

Legal costs alone for foreclosure run about $15-20,000; also the lost monthly payments, and damages caused by irate occupants who were forced out, plus vandals and thieves.

Down payment assistance programs are no longer allowed - found they went bad much faster than mortgages without.

Tax breaks included in the EESA focused on renewable energy - wind, refined coal, biomass, disposing of CO2, idle-reduction units on trucks, energy-efficient appliances, and some NASCAR etc. facilities. The bill also extended tax credits for solar energy, small windmills, plug-in electric cars, etc.

"Cram-downs" did not make it into EESA - mortgage-industry lobbyists did not like giving bankruptcy judges that authority to modify mortgages.

Recommendations: Bring back Glass-Steagall (repealed in 1999, led by Sen. Gramm), regulate the CDS market and hedge funds as well.

Paul Muolo has a track record of analyzing an economic situation with well informed research and depth of thinking. The same goes here. Extremely well written and well thought out, easy to read, very assessible--congrats to Muolo for a job well done. This is a book every American should buy and read--in fact, every taxpayer!

I hope the author does a sequel to it a year from now asking the hard questions about accountability in the bailout, who made the money, where'd it go, and how'd it really benefit the rest of us.

Looking forward to seeing this book do very well, as it should.

After enjoying the author's previous tome, Chain of Blame, I was interested in following how sub prime mortgage crisis would be handled. This is your guide to how the bailout money's to be spent and what that will mean to the individual. Like Muolo's last one, a truly fascinating read, and made all the more poignant because we're in the middle of this mess right now. Extremely well-written, with detailed analysis of all the main points, and easy to understand without being too scholarly. Kudos again to the author!

Anyone can read this book, and everyone should. The author provides details and insight into the Emergency Economic Stabilization Act of 2008 and specifically addresses it possible impact on us. In non-technical language, the author explains what seems to be a complicated financial mess.

Additional information on credit default swaps and mortgage backed securities could have been helpful, but that may have taken the book away from its intended audience: the average American tax payer.

Whenever any financial or political issue becomes too big and too complex, I always look for two things: Number one. of course, is - the ANSWER or the PROCESS for getting to resolve. Number two, and just as important is - someone to explain what happened and how it affects my family. Muolo satisfies my curiousity and my understanding in his very comprehensible writing style. Not only that, but the excellent short descriptions in the glossary really helped me "get it". I honestly feel I'm at the ground floor and better understand the issues whenever I get news updates or listen to the speeches and panels. I understand "why" the mortgage crisis happened and what we're doing through oversight and enactment of powers through the Treasury to fix it. Most enlightening in the book? explanation on how the Gramm-Leach-Bliley Act is a main factor in allowing this to occur. I am an active real estate investor and this really helps me understand what we investors are up against over the next 5 years.