Dear Congressman Tierney,

I am writing to urge you to vote against the Dodd-Frank homeowner and investment bank bailout bill. The gist of any bill is to get the taxpayer to bail out the banks, no matter how much you or anyone else proclaim that you are trying to help the little guy. The vast majority of taxpayers and homeowners will receive no benefit from this bill though it will create billions of additional debt that must be paid in future years. We can’t afford it nor should we be foolishly trying to prop up or set the prices of homes.

I urge you to simply let banks foreclose on individuals who overextended themselves or if the bank and the individual choose to modify their contracts on their own, then so be it. It should be clear by now that all previous attempts, such as the Hope Now Alliance, have had only limited success and that banks are really not interested in participating in these rescue bills. Mortgages were packaged into very complex instruments and sold off in slices to various parties. On top of that, a derivatives market exists where people literally gamble on whether loans will perform or defaults and the size of the derivatives market is many, many times the size of the actual mortage market. Too many people have an incentive for the loans to default so that they can collect on their “wagers”. Additionally, these people are likely to sue if they feel that the market is being manipulated. All proposals also overlook the presence of second-liens or HELOCs which must subordinate in order for a first mortgage to be refinanced. Given that most HELOCs recover nothing from a foreclosure, they have little incentive to invest a lot of their resources helping to rewrite the first mortgage. If they are going to get stuck with zero, they seem intent to not invest their time and energy and take their chances recovering something out of foreclosure. The only way they recover less than nothing is if they get sucked into these bailout plans because then they get nothing minus the cost of participating.

The government should be looking to reign in the runaway derivatives market by placing limits on the amount of leverage that firms can employ. Commercial banks are limited to leverage ratios of around 8:1. The investment banks are leveraged closer to 50:1. Long Term Capital Management which caused the 1998 meltdown was leveraged 200:1. The problem with leverage is that though it gives you an opportunity for outsized gains it also makes it quite probable that a few of the players will lose more money than they started with and be unable to pay their couterparties. This was the argument for the Fed bailing out Bear Stearns, in that it would create a huge systemic collapse due to the couterparty risks and cascading cross-defaults. So why hasn’t anyone legislated limits to the amount of leverage that can be employed by undercapitalized hedge funds and investment banks? I guess we just like to live on the edge, waiting for the day when a rogue trader or mismanaged investment bank can bring down the entire financial system.

Fannie Mae and Freddie Mac employ leverage around 50:1 by the way and that should scare you to death. If their prime protfolios were to experience defaults even 1% higher than they are experiencing today, they could each incur losses of $100 billion. Chances are pretty good that they will experience larger losses than this and with the implied backing of the US government, that could get very expensive.

You probably have noticed that the Fed has cut rates again to 2%, but what is interesting is that the 10-year Treasury yield actually went up. What this means is that mortage rates are going up and are actually higher today than when the Fed Funds rate was 5.25%. Which makes me believe that the Fed is dangerous. They are willfully destroying the currency and creating a flight to real goods (e.g. oil, food, fertilizer, steel, coal, etc...) in the markets. This comes back to every American in the form of price inflation at the gas station ($3.60/gallon here in Swampscott) and at the grocery store.

The Fed should be raising rates at this point in time. They are risking a full collapse of the bond market and significantly higher long-term interest rates. You probably don’t follow the bid-cover ratio at the auctions for the US Treasury, but you proably should as selling Treasuries is how all the programs you vote on get funded. If not enough people bid, the Treasury pays higher rates to finance our deficit. We have 9 trillion in debt that we have to keep refinancing and this year the annual deficit is likely going to be over $500 billion. If long-term rates go up just 1% because of this risky Fed policy, the US government’s borrowing costs go up over $90 billion per year.

You need to make balancing the budget your top priority. You need to tell your colleague Barney Frank to stop pushing for bailouts we can’t afford and to stop trying to make Fannie Mae and Freddie Mac the solution when they are absolutely guaranteed to blow up later this year due to their own mismanagement.

I expect Congress to either pass new laws or enact new regulations or to make the SEC and other agencies do their jobs to eliminate excess leverage and speculation in the markets which is little more than gambling.

I doubt that you will do any of this, because the path of least resistance states that you will support any bailout and perpetuate the creation of an entitlement nation where everyone gets bailed out. Until one day you kill the golden goose and find that the world doesn’t want to buy our treasuries any more. Then you will have to oversee either the largest reduction in services or the largest tax hikes in history when your access to the debt markets in interrupted.

Please, please, please, balance the budget. Stop supporting bailout bills.

Take care, Mike

My email to Senator Shelby -

RE: Republicans for No Bail-Out!

Dear Senator,

I am out raged by the idea of bailing out speculators at tax dollar expense.
As a voting republican for 16 years, I leave it up to our party to make the right decision in this crucial time for our nation.

Regards,
Jack

Quote:

I guess we just like to live on the edge, waiting for the day when a rogue trader or mismanaged investment bank can bring down the entire financial system.

I got a kick out of that one.