The Government and the Current Mess: You Write

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Adrian Day’s reputation for discovering big winners adds credibility to the global investing pioneer’s insights, which he has been sharing with The Gold Report via excerpts from recent articles in Adrian Day's Global Analyst. Those insights elicited “more comments probably than anything I’ve ever written,” he says—of which there are volumes! In this segment, he pulls together some of his readers’ insights.

Adrian Day’s reputation for discovering big winners adds credibility to the global investing pioneer’s insights, which he has been sharing with The Gold Report via excerpts from recent articles in Adrian Day's Global Analyst. Those insights elicited “more comments probably than anything I’ve ever written,” he says—of which there are volumes! In this segment, he pulls together some of his readers’ insights.

The Government and the Current Mess: You Write

As is so often the case, it is the government that creates a problem but free market capitalism that gets the blame. (“Ain’t it all a bloomin’ shame,” as the old cockney music hall song used to say.) The presidency of G. W. Bush is as far removed from free-market capitalism as any. The monetary policy of Alan Greenspan that created the bubble was decried by most free-market economists. And the “solution” to a problem created by misguided and venal government policies and programs is more extreme government programs that will only make matters worse.

Make Those Lousy Loans or Else!

I wrote about the government’s Community Reinvestment Act loan program, initially encouraging, and then under Clinton’s 1995 amendments, forcing banks to make appropriate ratios of such loans. It permeated bank culture. One reader, who shall remain anonymous for obvious reasons, wrote that her mother was a bank branch manager. She must make at least one CRA loan each month in order to earn her quarterly bonus, regardless of whatever other contribution she may have made to the bank.

What I hadn’t known was the government’s role in the securitization of “toxic” subprime loans. (I’m not surprised—scratch any problem, and you’ll like find the government lurking in the background—just hadn’t known.) After all, it really doesn’t make logical sense for banks to willingly buy other people’s bad loans.

Why Did Banks Buy Other People’s Bad Loans?

This reader pointed me to a University of Connecticut study. The 1995 CRA amendments gave lenders CRA credit for purchasing CRA securities, and required internet banks and others, which didn’t have a natural “community” to meet CRA ratios. Multiple institutions could now receive credits for any single CRA loan if it were bought and sold.

Because of the limited number of qualified CRA opportunities within an “assessed area,” demand increased and such loans carried a premium as high as a percentage point. The lender didn’t examine the securities’ underlying credit value, but bought them to earn the premium and—more importantly—their sacred CRA credit.

The same loan could earn multiple CRA credits by simply being sold on, thus spawning the securitization of bad loans, with additional costs and no additional economic benefit, which is a critical contributor to the current mess.

Another reader sent me an article from the Fox News website that discussed the clear conflict involved with Rep. Barney Frank, who was on the House Banking Committee throughout the 1980s, pushing for deregulation of Fannie Mae, while his domestic partner was an assistant director at Fannie for new products who stood to benefit from these subprime programs. (Even President Clinton— disingenuously?—says the Democrats have responsibility for resisting efforts “to tighten up a little” on Fannie.)

How Could They Get Away with It for So Long?

Another noted correctly that Fannie was able to get away with so much for so long only because of powerful support from Congressmen on whom they lavished expensive bribes (“campaign contributions”). Think about it: for years, Fannie did not issue financial statements that its auditors would sign off on, yet it maintained its Triple A ratings (from government-approved ratings agencies).

Remember, the massive investments in subprimes increased Fannie’s reported earnings and bonuses for top management, as well as providing cash flow for Fannie to divert contributions to political organizations that promoted subsidized housing.

That disgraced executives of government-supported enterprises should receive and keep such huge compensation packages, as did Fannie’s Raines and others, is outrageous.

That his chief Congressional buddies like Chris Dodd and Barney Frank should now be involved in crafting solutions and should sit on their high chairs pompously berating corporate executives is perverse; they themselves should be on the hot seat. In a red-blooded society, they’d be chased down and strung up.

What Have They Wrought?

Beyond the economic devastation and the destruction of the dollar, one other aspect of this has not been commented on so much, but will be. It will be the lasting monument of the Bush presidency: the creation of a fascist economic system which may take decades to undo.

Think about it: one man, Paulson, calls into his office the CEOs of eight leading banks; tells them the government is going to “invest” in their firms; that they don’t have a choice; gives them a paper with the terms which are non-negotiable; and puts restrictions on various activities of these private companies. Oh, and there’s no need to bring it up with your board of directors because they have no say in the matter. Who does that put you in mind of if not Mussolini?

I am sorry if my words appear intemperate to some, but we are witnessing now an episode that will be recounted, centuries hence, as central to “the decline and fall of the American empire.”

So let’s end with some humor. Fed chairman Ben Bernanke said that the Federal Reserve will create new mechanisms to limit asset price bubbles. You’ve got to laugh.

Adrian Day is President of Adrian Day Asset Management, which manages portfolios in resource and global equities. Contact him at Adrian Day Asset Management, 801 Compass Way, Suite 207, Box 6643, Annapolis, MD 21401; Tel: 410-224-2037; Fax: 410-224-8229; Email Adrian Day

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