Chicago Daily Observer

The Treasury Department has told members of Congress that the US faces a financial tsunami if a bill to allow the government to purchase up to $700 billion of toxic financial securities from financial firms is not passed – this week.

Unfortunately, this solution of giving the US Treasury almost unlimited power to buy distressed securities could be avoided if the government made some simple (and temporary) changes to mark-to-market accounting rules. So far, and for many unknown reasons, these changes have been considered off limits.

Why drawing such a hard line in the sand is so important, is a real mystery. Certainly, firms that took excessive risk should be punished. And the US should avoid creating moral hazard whenever it can. But saying; “I told you that you would stay in your room for a whole week if you disobeyed, and I don’t care if the house is burning ... Read More...

(In 2005) For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn’t become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn’t even get the Senate to vote on the ... Read More...

Moving down the Democratic Party food chain, we meet William M. Daley, son of former Chicago Mayor Richard J. Daley and brother of current Chicago Mayor Richard M. Daley. Daley worked as special counsel to President Clinton and chairman of Al Gore’s 2000 presidential campaign. He also served as a Clinton secretary of commerce from 1997 to 2000, and earlier as president of Amalgamated Bank in Chicago. He is now an executive at JPMorgan Chase & Co. Daley was appointed to the Fannie Mae board in 1993 by President Clinton.

Less than six months after the federal government interceded to prevent the collapse of Bear Stearns, it has now seized control of both Fannie Mae and Freddie Mac.

Although I am not thrilled with some details of the Treasury Department’s plan, something had to be done. The ultimate fate of the GSEs (Fannie and Freddie) increased uncertainty much like an approaching storm. Would they have to suddenly dump their massive portfolios of mortgages? Would they cease securitizing mortgages, throwing the mortgage market into further turmoil?

For the mortgage security marketplace these questions were huge. The mortgage market has been in disarray, spreads increased and prices were held artificially low, even for conforming, and performing, conventional mortgages. To top it off, reduced prices, because of “mark to market” accounting rules, led to pressure on capital requirements, which in turn increased the odds of a liquidation of huge mortgage portfolios. This “vicious ... Read More...

President Bush is poised to sign the housing and Fannie Mae bailout bill, after the Senate passed it with 72 votes on the weekend. But an underreported part of this story is that Majority Leader Harry Reid refused to allow a vote on Republican Jim DeMint’s amendment to bar political donations and lobbying by Fannie and its sibling, Freddie Mac.

This is a rare parliamentary move for a body in which even Senators in the minority party have long been able to force votes. The strong-arm play illustrates how politically powerful these government-sponsored enterprises remain even after going hat in hand to taxpayers.