Follow the Money!

How did all this stuff start? Just how did a “naked Emperor” gain the ultimate prize? One question has a complicated answer while the other is much easier.

So, because many people are happier with a short response, I’ll try that first.

John McCain lost because he was the wrong candidate at the wrong time and he compounded those “felonies" by promoting the wrong issues.

But, when all was said and done, the country demanded “Change”. It is much less clear just what it was they wanted changed but now they’ve got it. I doubt they will like it but as the Reverend Wright so eloquently put it, “America’s chickens are coming home to roost”.

Here’s the first flutter;

Tim Geithner, the smartest man in the world and the tax cheat who wasn’t quite so smart was paraded by Obama at a press conference a couple of weeks ago. Remember him? He’s the one that’s bright enough to dig us out of our financial mess.

One brave soul, who probably won’t get to ask another, questioned Obama about his plan to solve the financial mess but, completely in character, Obama refused to give details. Probably because he didn’t know them and, if he did, he certainly didn’t understand them. Anyway he promised that the very next day Turbo Tim would reveal all in excruciating and brilliantly insightful detail.

Now, fast-forward 1 day and here comes Mr. Geithner to confront an eager press corps. His preamble said it all when he announced so proudly that he was not going to present any details.

No wonder the market that day plunged 400 points.

But, I digress. To know how all this began; we must go back to 1977. Carter was in the White House wearing the ugliest sweater ever sold by Sears. And Capitol Hill was swamped with a majority of the left and with unbridled alacrity Carter signed the “Community Reinvestment Act”.

Some of its provisions lay dormant through the Reagan boom years and it wasn’t until Clinton’s Attorney General, Janet Reno, decided it was politically smart to start strong-arming the lending institutions into “easing” their log-held criteria.

Most CEOs, and those heading up banks are no exception, know that their first duty is to protect the investment of those who anted up the money to start with. And so, they resisted. Reno was pissed and hauled in the CEOs of the biggest lenders to meetings at the Department of Justice. Even to the pig-headed Reno, it was obvious that they were not going to yield and so, instead of the stick, she decided that she needed a carrot. Well, I’m no gambler but I could be tempted into a casino if I knew I couldn’t lose,

The way it worked with the lenders was that Freddie Mac and Fannie Mae would buy the dubious loans. And, “Whoopee”, said the heads of those quasi-Government agencies because their annual bonuses were directly linked to the amount of business they undertook. They in turn “packaged” the loans into products known collectively as “derivatives” which eventually were sold to mutual fund companies and other investment bodies.

Many of the loans made by the banks had a fixed rate of interest for a finite period only and all was well until that ended and the rates were adjusted upwards some by an alarming amount. Now, it doesn’t seem to have occurred to these people to actually read what they signing up for but they signed anyway. Perhaps, there were two kinds of people caught in this trap. There were those who struggle to this day to fulfill their obligation but there were those who signed up knowing full well that not only could they not afford to repay, they also had no intention of paying. So, when the price tag went up many of these folks decided that their way out was to sell, grab the quick profit inherent in all real estate transactions and run.

Wrong, there so many houses on the market that prices had been driven down to the point that the owners owed more than the property was worth. So, many simply walked away, the lenders turned to Freddie Mac and Fannie Mae and demanded that their losses be covered. Another big problem, because any insurance company can only continue to exist so long as not every policy holder claims at the same time.

So, what had Government been doing while all this was building? After, all Freddie Mac and Fannie Mae are quasi-government agencies and supposedly are subject to Capitol Hill oversight and scrutiny. Despite warnings from the White House and from several Republican politicians like John McCain, the committees in the House and Senate responsible for such oversight were now chaired by Democrats Barney Frank and Chris Dodd as a result of the 2006 elections and they flatly refused to believe that anything was amiss and protested until less than a year ago that Freddie and Fannie were doing just fine.

Why they did so is a matter for conjecture but it’s probably a combination of several factors. Politically, the Democratic Party is dedicated to spreading the American dream of home ownership as widely as possible. Secondly it is doubtful if Dodd or Frank really understood the parts of the economy they were overseeing. And, the top people at Freddie and Fannie “cooked the books”.

It was a disaster waiting to happen and it did.

Yesterday, Obama announced his housing “bailout program” and newspaper headlines this morning proclaimed that “Obama Won”. But did the American people?