American Republic Online

There has been some finger pointing on this Fannie & Freddie, sub-prime mortgage debacle - but not nearly as much as - oh - the baseball steroid scandal.  Why?  Well a lot of the congressmen to blame are still around and an election is coming up…. So here’s a look at the long road to colapse as well as some of the warnings that could have prevented it.

1977 - Community Reinvestment Act - President Carter & Democratic Congress

The CRA was a result of national pressure for affordable housing, and despite considerable opposition from the mainstream banking community. The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution’s application for deposit facilities. The Act charged the Federal Reserve System to implement the CRA through ensuring banks and savings and loans met their CRA obligations. The CRA is also enforced by the “FDIC”, CRA Statute.  - wikipedia.org

1989 - Financial Institutions Reform Recovery and Enforcement Act - President Bush Sr. & Democratic Congress

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Frantic Day on Wall Street as Banks Teeter:

Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry’s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.

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Here’s an interesting map from Amazon.  It shows a “state’s percentage of ‘red’ and ‘blue’ book sales over the past 60 days“.  It’s mostly red.

Wait!  Conservatives read books?!  And use an internet bookstore?!  My world just got flipped upside down.

(”Interestingly,” the bluest area is DC.  Go figure.)

I guess I was too long on my prediction.  Instead of “Fannie and Freddie will be nationalized before next summer, probably even the end of this year,” I should have said “Fannie and Freddie will be nationalized before next week!

Well, it’s good news for those of us looking to buy a home on the cheap in the coming months.

If any of you took the time to read my post on the FDIC, here’s a follow up.  A case study:

National City (NCC) is the bank Elizabeth and I used when we lived in IL, and it is trading around $5 now, down from about $40 last April. 

Now, part of the wonders of our modern capital economy is that financial companies borrow money (either through depositors or by issuing bonds, etc) and then lend it out at a higher rate – the essence of banking, right?  Well, how long do you think a bank can stay in business borrowing money at a 7% rate, and loaning it out at 14%?  A pretty long time right?  Well, what if they are borrowing at 14% and then lending it out at 7%?  That’s the rate that investors are demanding for National City’s debt: 14%.  

Consider this: last quarter NCC lost about $1.76 billion (almost $20 million a day).  Even though they raised about $7 billion in April with an equity issuance, they basically used it to pay down their debt. 

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