Deal, or no deal on bailout?

Monday's rejection by the House of Representatives of a proposed $700 billion financial rescue package sent stocks into a 777-point tail spin - the largest one-day drop ever for the index - and left hometown America jittery and uncertain.

Today, the Emergency Economic Stabilization Act of 2008 is in the tank thanks to a 205-228 vote.

As economic storm clouds continue to gather, Marietta is holding its collective breath, watching and waiting.

"I'm going to ride it out," said Ronnie Davis, 60, of Marietta. "I'd never been in the market until 10 years ago. My broker hasn't called and told me to sell, so I'm not. I really don't understand it all that much."

In an address to the nation early Monday prior to the House vote, President George W. Bush urged support of the bailout package, saying it was needed to "keep the crisis in our financial system from spreading throughout our economy."

Bush's plea fell on a majority of deaf ears.

Ohio Democratic Congressmen Charlie Wilson and Zack Space voted for the rescue package.

"We made critical improvements to this plan since it was first presented by the Bush administration," Wilson said in a statement issued Monday. "I am disappointed that so many members of the House put their own political futures ahead of America's future."

Space's office could not be reached for comment.

Fred Wood of Marietta called Monday's vote "a disaster."

"No question, you have got to do something and have to do it now," said Wood, 81.

When the government bailed out Chrysler (Motors) years ago, the deal ended up making money, he said.

"We've got to give it a shot," Wood said.

When it comes to investing, Wood's advice is "don't panic, don't bail out, wait it out."

Local financial experts pretty much agree.

Robert Voisinet, certified financial planner with Raymond James Financial in Marietta, said Monday that it's too late to panic.

"We've seen this before, and we'll see it again," he said. "I've got a lot of faith in the American people to work their way out of this, with or without, the help of Congress."

A bit of history

Voisinet said seeds of this economic storm were planted in 1992 when Congress made the decision to "loosen up" lending practices and guidelines, allowing more people to have home ownership.

"The result today is that mortgage debt is worthless in value and banks across the country are holding bad loans," he said. "Banks have greatly curtailed their lending and that's why the market is reeling."

The growing fear is that the U.S. is slipping into recession or even into a great depression, Voisinet said.

"Politicians failed to inform the public just how bad this situation was," he said. "There have been warnings for the past couple of years."

If nothing is done, Voisinet believes the economy will eventually correct itself, but it will take far more time to happen.

"It will be more painful and more people will be hurt," he said.

Looking ahead

This financial planner expected a close vote Monday, but thought the bank bailout would pass. He blames a speech by House Speaker Nancy Pelosi, D-Calif., just prior to the vote, for killing the deal that Congressional leaders and the administration had brokered.

What to do?

His clients would be told that if they are already fully invested they should check what stocks they own, make sure it's something they're comfortable with, but in general ride the current market climate.

"As for cash, slowly put it to work in the market over the next 12 months," Voisinet said. "When everybody else is selling, you want to be buying."

Suzanne Walker of Marietta said she didn't hear about the vote until she was on her way home from work and listening to National Public Radio.

"It's such a complex issue. The biggest thing that concerns me is there are so many people in foreclosure," Walker said.

In fact, she has a friend who is in danger.

"My friend lost her job and is three months behind on her mortgage payments," Walker said. "Even if it doesn't affect us right now, we all know someone who it does."

Walker said she is also disappointed that lawmakers could not come together on this issue without being political.

"I was hoping they could get by politics and do something for the American people," she said.

Take a breath

Marietta College economic professor Greg Delemeester suggests that everybody take a "timeout" and relax.

"For those on Main Street, hang on," he said. "We've been through Wall Street's ups and downs before, and the federal government has always come in and calmed the situation. This time is a bit different."

Having so much money at stake has paralyzed major lending institutions, Delemeester said.

"Banks lending to one another is at issue, not lending to individuals," he said. "I could probably get an auto loan if I went into a bank today."

Fallout from the economic crisis could even hit the college campus eventually, he said.

"Right now, college kids are not paying attention to this, but if it begins to affect student loans, that will be interesting," he said. "The loan market is drying up."

Another result for the average person will likely be a dramatic change in how we borrow money to buy a house in the future.

"Mortgages, I predict, are going back to the old ways of doing things and adjustable mortgages might be gone for good," Delemeester said.

Not that many years ago, home loans were not possible without 20 percent of the purchase price down and some certainty that the borrower could repay the loan.

Delemeester, who has been at Marietta College 22 years, said his sense is that the national crisis - at the onset - will not hit Main Street Marietta hard.

"What I see as most important now is that the general business climate in Ohio is not doing very well and until the state of Ohio gets its systems in order, that will impact us here," he said.

The Associated Press contributed.

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Harleyrider
10-01-08 2:23 PM »Report Abuse	This threw off banks' capital requirements. Under U.S. regulations, banks have to have a certain percentage of assets to back up the loans they make. Lots of banks and financial institutions had MBS assets on their books. With these moving to zero, they didn't have enough capital on hand for the loans that were outstanding. They rushed to raise capital, which raised fears about their solvency and compounded into a self-fulfilling prophecy
Harleyrider
10-01-08 2:23 PM »Report Abuse	No one fully understood how exposed the MBS were to the rising foreclosures. The market for them dried up. No one traded them. The market became effectively "illiquid." American accounting standards, however, required firms to use "mark-to-market" to value their assets. This means that you value your assets based on what you could sell them for today. Because no one would trade MBSes, most had to be "marked" at something close to zero.
Harleyrider
10-01-08 2:22 PM »Report Abuse	Then the MBS market collapsed. The complexity of these financial products cannot be overstated. They usually had two or three "tranches," different baskets of mortgages that paid out in different ways. Worse, as they moved through the system—being bought and sold by different firms—they were sliced and diced in varying ways. A MBS owned by one firm could be very different when it was sold to another.
Harleyrider
10-01-08 2:22 PM »Report Abuse	The overall numbers moving into foreclosure were small. Someone simply looking at housing stats could be forgiven for wondering what all the fuss is about. Nationally, the number of mortgages moving into foreclosure is just around 1 to 2 percent, suggesting that 98 to 99 percent of mortgages are sound. But the foreclosed mortgages punched way above their weight class; they were laced throughout the MBS market.
Harleyrider
10-01-08 2:21 PM »Report Abuse	Everything worked as long as housing prices continued to rise. The most pessimistic scenarios on Wall Street showed a leveling off of housing prices; no one foresaw an actual decline in prices. Suddenly, though, there weren't enough buyers. In hot real estate markets, builders raced to bring inventory to market that they thought was inexhaustible. But at this point everyone (essentially) who could possibly qualify for a mortgage had received one. At the same time, the first wave of the more exotic mortgages began to falter. Interest rates on adjustable rate mortgages moved higher—the Fed was finally tightening the money flow—and mortgages that were initially interest-only were close to resetting, with monthly payments jumping to include principal. A not insignificant number of these mortgages moved into default and foreclosure.
Harleyrider
10-01-08 2:21 PM »Report Abuse	Unfortunately, after several years of a housing boom, the available pool of households who could responsibly use the more exotic financing products had dried up. In short, there were no more people who traditionally qualified for even a subprime mortgage. However, Fannie and Freddie were still signaling that they wanted to buy these products. At the same time, activist groups were agitating for more lending to low-income families. Banks realized they could make even more exotic loan products (e.g., interest-only loans), get the activists off their backs, and immediately diffuse their risk by selling the mortgages into MBSes. After all, Fannie and Freddie would buy anything.
Harleyrider
10-01-08 2:21 PM »Report Abuse	Fannie and Freddie then went on a subprime bender. They made it clear that they wanted to buy all the subprime or Alt-A mortgages that they could find, eventually acquiring around $1 trillion of the paper. The market responded. In 2003 subprime mortgages made up less than 8 percent of all mortgages. By 2006, they were over 20 percent. Banks knew they could sell subprime products to Fannie and Freddie. Investments banks realized that if they laced ever increasing amounts of subprime mortgages into the MBSes, they could juice the returns and so earn bigger fees. The rating agencies, thinking they were simply dealing with traditional mortgages, didn't look under the hood.
Harleyrider
10-01-08 2:21 PM »Report Abuse	At the same time, Fannie Mae and Freddie Mac were going through a crisis. In 2003 and 2004, an accounting scandal was revealed. The two public-private partnerships were cooking the books to show phantom profits. The Bush administration and its allies on the Hill pushed a strong bill to reform how these institutions operated. The measure came very close to passing, but Fannie and Freddie cut a deal. They would refocus on expanding mortgages for low-income borrowers if the feds kept out of their operations. The bargain worked. Virtually all the Democrats and a few Republicans backed the two companies and the reform effort failed.
Harleyrider
10-01-08 2:20 PM »Report Abuse	The additional capital to underwrite mortgages was a good thing...up to a point. Homeownership expanded throughout the decade. Over the last few decades, the American homeownership rate has been around 60 to 62 percent. At the height of the bubble, homeownership was around 70 percent. It is clear now that many people who got mortgages at the height of the bubble should not have. But Wall Street needed to feed the MBS stream.
Harleyrider
10-01-08 2:20 PM »Report Abuse	In the early years of this century, mortgage-backed securities exploded. Their growth provided unprecedented levels of capital in the mortgage market. There was a lot more money available to underwrite mortgages. At the same time, investment houses were looking to replace the healthy fees earned during the dot com bubble. MBSes had fat margins, so everyone jumped into the game.
Harleyrider
10-01-08 2:20 PM »Report Abuse	One of the major factors pushing investors into these securities was the Federal Reserve's weak money policy. Immediately after the terrorist attacks of 2001, the Fed began a sustained period of easing interest rates. Its efforts went so far that, at one point in 2003, we had effectively negative interest rates. Institutional investments needed a place to park money and earn some kind of return. Mortgage-backed securities became a favorite investment vehicle. Under traditional models, they were very safe and, because of Fed policy, even the most conservative fund could earn better returns than they could on treasury notes.
Harleyrider
10-01-08 2:19 PM »Report Abuse	Mortgage-backed securities (MBSes) are the principal source of pain in the current environment. Investment houses would bundle individual mortgages from several banks together into a bond-like product that would be sold to individual investors. Mortgages have historically been seen as among the safest investments. In an era of rising house values, "safe" became "guaranteed returns."
Harleyrider
10-01-08 2:19 PM »Report Abuse	It is the intersection of several underlying trends that have brought us to this point, not a breakdown in any specific part of the financial sector. The fundamental flaw with the bailout approach is that it ignores these trends and simply seeks to shore up the finances of certain Wall Street institutions
Harleyrider
10-01-08 2:19 PM »Report Abuse	The overall economy doesn't even face a liquidity crisis in the current turmoil. Consumer, commercial/industrial, and real estate loans are all up over last year. Main Street is doing fine. The liquidity crisis is confined to Wall Street, between and among investment banks, insurance and securities firms, and hedge funds. There is the possibility that the contagion could spread, but in a global capital market, this is hardly certain.
Harleyrider
10-01-08 2:18 PM »Report Abuse	Let's be clear: This is a Wall Street crisis, not a national economic crisis. The overall economy, while a bit weak, is still growing. Some politicians are comparing the current environment to the Great Depression. But in 1932, when the federal government last moved to bail out the banking sector, economic output had fallen 45 percent and unemployment was a staggering 24 percent. Today, economic output is actually up and unemployment is a historically modest 6.1 percent.
Harleyrider
10-01-08 2:18 PM »Report Abuse	The unexpected 228-205 defeat of the housing bailout in Congress yesterday threw a curveball across Wall Street. It contributed to a large sell-off on Wall Street, where the bailout had already been "priced" into the market. The Dow shed just over 6 percent, the 18th largest drop in its history. But given the dire warnings about financial chaos that would result unless there were a bailout, this seems fairly modest.
Harleyrider
10-01-08 2:18 PM »Report Abuse	Melba here is an article from reason online. It proves you wrong.
goulash
10-01-08 8:09 AM »Report Abuse	Abbott is exhibit A. The people have spoken. And so eloquently.
goulash
10-01-08 7:39 AM »Report Abuse	Hey Chucky, you slacker. Better get to work. Do you think you can just sit around and watch "ORPRAH" all day? Did you stay up too late last night watching "CORNAN"?
goulash
10-01-08 7:29 AM »Report Abuse	Who is ORPRAH?
goulash
10-01-08 7:27 AM »Report Abuse	Incredibly McCain is running television ads that suggest that Obama is voting for the bailout and the implication is that McCain is against it. He really does have a low opinion of the American voter. Anyone who stands erect knows that McSame supports this bill.
goulash
10-01-08 7:25 AM »Report Abuse	Also in Couric interview, Palin was unable to identify a single newspaper that she reads regularly. She said that she reads "Oh, just all of them."
goulash
10-01-08 6:01 AM »Report Abuse	Latest on Palin: She is unable to name a Supreme Court case other than Roe v. Wade.
telefonica
09-30-08 10:47 PM »Report Abuse	Whats with toast and arugula with you Melba?
rocker
09-30-08 9:54 PM »Report Abuse	I just saw a video on FOX News that showed the Dems in 2004 saying there was nothing wrong with Fannie Mae and Freddi Mac. Also, theres a new ad featuring BIll Clinton saying: “I think the responsibility the Democrats have may rest more in resisting any efforts by Republicans in Congress or by me as President to put some standards and tighten up on Fannie Mae and Freddie Mac.” Dems are already back peddling, some apologizing for not taking the problem serious. Obama and the Dems are NOT READY TO LEAD!

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