Big Business and Banking Bailout for Billions Act of 2008

One proposal that is not as often thrown around the halls of Congress to solve the foreclosure crisis is freezing interest rates at a level low enough for most homeowners to afford their mortgage payments. Despite the fact that Congress has no authority to interfere in such private contracts, the Constitution has been somewhat ignored for the past hundred years. Thus, an interest rate freeze could be enacted (under some sort of tyrannical emergency powers act) and it may help homeowners save their homes, but it would still hurt the banks quite a bit, which is why the politicians would never go through with the plan.

Instead, all that is being offered is an ambiguous bailout package whereby the Treasury would borrow $700 billion from the Federal Reserve in order to provide welfare to any corporation that may be in trouble. Financial firms, automotive companies, and any other business would be eligible for a taxpayer funded rescue. In return, American homeowners are still expected to pay their mortgages and other bills at the predatory interest rates at which they were offered to begin with, while the banks dump the losses from these predatory loans onto the very people unable to pay them back.

All of these subprime, Option ARM, and other creative mortgages were packaged and sliced up and rearranged into bonds. The bonds were valued based on the income that they would generate over time through interest rates set at 3% for 2 years then 14% for 28 years as the rates reset based on market conditions. With the banks and the Federal Reserve controlling interest rates in the economy, it was a simple matter to offer low teaser rates and then spring the trap later on.

But the banks counted the value of these bonds based on this estimated income and with low default rates. The MBSs, ABSs, CDOs, and other confusing mortgage securities were valued under mark-to-market accounting rules, which ensured that they would look good for at least few years. House prices kept increasing and even if the underlying loans went bad, the properties could be sold and any losses on the bonds more than made up for. A mortgage servicing fraud industry based in out of the way states ensured that hedge funds based in the Cayman Islands could raid local communities in Detroit and manufactured suburbs in California from their offices in New York.

Now with the loans defaulting, these same giant investment firms and banks are being forced to take huge writedowns on the garbage bonds they had overvalued to begin with. Mark-to-market when the market has disappeared means they have to take the bonds and mark-to-zero. Now there is a lack of confidence in the entire financial system, with banks unwilling even to make loans to each other because of the uncertain exposure to such toxic mortgage securities.

Thus, if a freeze was enacted by the federal government and mortgage rates were set to a lower level, the bonds would have to be written down even further by the banks to mark them to their new market price. And this is still assuming that lower interest rates would help borrowers save their homes from foreclosure. At the least, banks would have to write down the value of the loans partially to show the lower interest rate; at worst, the loans would still default and have to be marked to trash.

So obviously, the banks do not like the idea of an interest rate at all. They would much rather dump all these worthless bonds on the American people instead of admit they hugely overvalued the housing market and have to write down the paper losses on securitized mortgages. This is why Fed Chairman Bernanke is asking Congress (and you and I) to buy these bonds from the banks at 100% of their face value, even though estimates of their true value range between 0-35% of face value at this point.

The Big Business and Banking Bailout for Billions Act of 2008 is just more socializing losses and privatizing gains. Nothing more, except that this time, it is on such a massive scale that no one -- the people, their representatives in Congress, even the docile media -- believes their deceptions anymore. Opposition against the bailout could not grow any more fervent, with over 90% of the population against it; in fact, the few people in favor of the rescue are most likely the ones employed by the financial firms and mortgage lenders likely to face bankruptcy without stealing billions of dollars from Americans.