The Sunset Cowboy: It Was Not One of those Presidencies Where You Ride Off into the Sunset Waiving Goodbye!
O. Max Gardner III

It’s the end of an era. We know that 2008, much like 1932 or 1980, marks a dividing line for the American economy and society. And, the vast majority of Americans know or admits that the Bush Presidency has been the biggest eight year disaster in the history of the Republic. In addition to massive blunders on foreign policy, which deserve a separate set of books to describe, the overall domestic record of George Bush and company makes the Katrina rescue effort their number one domestic achievement. And, after eight years of Bushenomics, the new deal on Wall Street is a one-way sign with the arrow pointing down. In fact, the 32% drop in the value of the stock market this year is only surpassed by the 40% annual drop that occurred in 1931, in the midst of the Great Depression.

The truly bizarre fact of the moment is that Bush still does not appreciate the nature and extent of the financial damage he has caused. He has not been humbled one bit by his own ignorance. And, the ignorance was not confined to George. Way back in 2006, Bernanke and Paulson both believed that the financial crisis was limited to what they called “subprime mortgages”—loans made to consumers with weak credit scores—and that the “crisis” would be limited in time and scope since the subprime mortgages only represented about 12% of all home mortgages. Paulson even stated at one point that since these subprime mortgages were “widely held” by many different banks, any losses would be diluted to individual banks and investors. I guess it depends on how you define the word diluted? Maybe the correct term should have been “polluted.”

Of course, we all know that Paulson, Bernanke and Bush were wrong on the cause of the financial problems and the limited scope of the potential financial damage. And, their attempt to “cast the blame” on subprime borrowers for a minor “rough patch” in the economy has been completely debunked. Admittedly, subprime mortgages were a factor in the current economic crisis. However, their defaults in historic numbers only served to expose a much larger and massive financial gamble by the smartest guys in the room. These are the guys who borrowed up to $30 for every $1 of hard money and then created some of the most bizarre financial instruments and structures in the history of mankind to market these new “products.” There is something out of kilter by referring to these financial documents as “products.” Products of what? Greed. Ignorance. Stupidity. All of the above. Suffice it to say, they were bad!

Because subprime mortgage loans were embedded in complex securities whose value and ownership were hard to determine, the massive subprime defaults caused investors and others to take a closer look at all of these new financial instruments and derivates. What they saw caused them to lose all confidence in the integrity of these financial structures, in the securitization models used to sell the instruments; in the current market value of the instruments; in the integrity of the underlying assets; and consequently in the rating agencies who had declared these new investments to be safe and in some cases deserving of the top ratings. Similar doubts quickly spread to all of the other securitized structures and bonds; demand for these bonds started cliff diving; and lenders started hoarding cash to protect themselves and indeed in many cases to comply their minimum capital regulatory requirements.

Once short-term lending ceased, the entire system was placed on the edge of failure and such historically stable institutions as Lehman Brothers failed. It has been estimated that as much as $75 billion of the true market value of Lehman Brothers Holdings, Inc., was destroyed by the unplanned and chaotic form of the firm’s bankruptcy filing in September of last year. And, as it turned out, the emergency bankruptcy filing prevented Lehman from trying to unwind some of its complex derivatives and credit swaps in way that could have preserved billions in equity for the creditors and stockholders and saved more financial pain for the mega-insurers and debt swap holders such as AIG.

This is not to say that the American consumer has “clean hands” in this crisis. It was once believed that the American consumer could borrow and spend more, because higher home values and stock prices substituted for annual savings. And, as a side-bar, the consumers obviously believed this myth since the average savings per year per family was a “negative number” for the first time ever in 2007.

From 1985 to 2005, the personal savings rate dropped from 9 percent of disposable income to almost zero. In 2007, the personal savings rate was below 0, which meant we had no savings at all that year and actually spent more than we saved. But over these same years, households’ net worth (assets minus liabilities) quadrupled, from $14 trillion to $57 trillion. This unprecedented rise in net worth was a direct and proximate result of the largest “housing bubble” in the history of the modern world. One great lesson of 2007 is how little we know or understand about the economy.

The increasing level of consumer spending from 2000 through 2007 was fueled by massive consumer over-borrowing. Consumers borrowed against the “paper equity” in their homes and continued to increase the “carry-over” balances on their credit cards. Consumers used home equity loans to purchase motor vehicles, boats, campers, and new-fangled HD televisions and other electronic equipment. Since this borrowing has been eliminated by the credit crisis, the amount of consumer spending has dropped, which has substantially exacerbated the economic crisis. One commentator recently said that the only growth product the United States has produced since 2000 is consumer debt. Well, that turned out to be a very bad product and the production company is now defunct and bankrupt. Many economists are predicting the GDP for 2009 will be minus 8%. That is less than zero for those of us who are math-challenged.

But the story of how we got here is partly one of Mr. Bush’s own making, according to a New York Time’s and Business Week review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone. Bush defines “left alone” as meaning little or no regulation or oversight from Washington.

One of the enduring images of the Bush years will be the 2003 photograph of the Federal Reserve Governors with a chain saw in each hand and the stated intent to “cut” 9,000 pages of federal banking regulations. It is possible that the gas crisis of 2008 was caused in part by the amount of fuel used to cut-through all of those damn pages and pages of “red tape.” But, by God, they did it. This much we know for sure.

To the extent that homeownership is a worthy goal, it must be admitted that Bush pushed hard to expand homeownership, especially among minorities, during the first 7 years of his Presidency. This initiative dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards. The so-called NINJA Loans (no income, no job, and no assets) were most certainly an unwanted step-child of the Bush approach to little or no regulation. “The market will take care of the bad guys,” he said in 2003 after the infamous chain saw photograph.

Mr. Bush did foresee the danger posed by Fannie and Freddie, the government-sponsored (and currently government-owned) mortgage finance giants. Many powerful Republican and Democratic members of Congress opposed such regulations, to be fair about it. And, it is true that the president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary, Hank Snow, wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they were headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February of 2008, for example, Mr. Bush was still calling it a “rough patch.” And, the fact that this sounded just like Herbert Hoover in 1929 scared the Hell out of everyone in the markets. In fact, every time Bush held a press conference the stock market held its collective breath.

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis. For much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers. So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending. Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away. Many economic experts, including some in the White House, now share that view.

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout of the 1990s. “To make the market work well, you have to have a lot of rules.” But Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.

Bush looked for like minds on Laissez-Faire to promote his desire to limit Federal regulations of the mortgage markets. The president’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general’s report. And, then there is the Bernard Maddon affair, which the SEC investigated about a year ago and declared it to be safe and secure business operation. We know that Mr. Maddon’s $50 billion hedge fund was actually the largest Ponzi scheme in history, including the one developed by Mr. Ponzi himself.

When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks. The FDIC and OTS took the same preemption stances and hammered away at one state regulation after the other. The administration won that fight before the Supreme Court in Waters v Wachovia Bank & Trust Company. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.” Well, Roy, it looks like Marshall Dillon and his Deputy, Chester, lost this round and all of Dodge City to boot!

The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary. In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Mr. Bush’s re-election campaign; more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics. The administration did not finalize the new rules until last month. Among the Republican Party’s top 10 donors in 2004 was the one and only Roland Arnall. Arnall founded Ameriquest, then the nation’s largest lender in the subprime market. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread.

Andrew H. Card., Jr., Mr. Bush’s former chief of staff, said White House aides discussed Ameriquest’s troubles, though not what they might portend for the economy. Mr. Bush had just nominated Mr. Arnall as his ambassador to the Netherlands, and the White House was primarily concerned with making sure he would be confirmed. “Maybe I was asleep at the switch,” Mr. Card said in an interview. Asleep at the switch? I don’t think Card even knew there was a switch!

Brian Montgomery, the Federal Housing Administration commissioner, understood the significance. His agency insures home loans, traditionally for the same low-income minority borrowers Mr. Bush wanted to help. When he arrived in June 2005, he was shocked to find those customers had been lured away by the “fool’s gold” of subprime loans. The Ameriquest settlement, he said, reinforced his concern that the industry was exploiting borrowers. In December 2005, Mr. Montgomery drafted a memo and brought it to the White House. “I don’t think this is what the president had in mind here,” he recalled telling Ryan Streeter, then the president’s chief housing policy analyst.

It was an opportunity to address the risky subprime lending practices head on. But that was never seriously discussed. More senior aides, like Karl Rove, Bush’s chief political strategist, were wary of overly regulating an industry that, Mr. Rove said in an interview, provided “a valuable service to people who could not otherwise get credit.” While he had some concerns about the industry’s practices, he said, “It did provide an opportunity for people, a lot of whom are still in their houses today.”

The White House pursued a narrower plan offered by Mr. Montgomery that would have allowed the F.H.A. to loosen standards so it could lure back subprime borrowers by insuring similar, but safer, loans. It passed the House but died in the Senate, where Republican senators feared that the agency would merely be mimicking the private sector’s risky practices — a view Mr. Rove said he shared. Looking back at the episode, Mr. Montgomery broke down in tears. While he acknowledged that the bill did not get to the root of the problem, he said he would “go to my grave believing” that at least some homeowners might have been spared foreclosure.

Today, administration officials say it is fair to ask whether Mr. Bush’s ownership push backfired. Mr. Paulson said the administration, like others before it, “over-incented housing.” Mr. Hennessey put it this way: “I would not say too much emphasis on expanding homeownership. I would say not enough early focus on easy lending practices.”

Speaking to the American Enterprise Institute in mid-December of 2008, President Bush said that he will leave it to historians to analyze “what went right and what went wrong” with his administration. He claimed that he was “too focused on the present to do much looking back.” Regrettably, the Bush Administration will be remembered as one with no focus in terms of regulatory oversight of banks, stock markets, investment banks, hedge funds, or any other financial enterprise.

On October, 15, 2002, President Bush said that “We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.”

I am not sure how many lights Bush actually turned on but it certainly was not enough. The lights I have put on the events of the past 8 years have lead me to predict that things will be much worse in 2009 than they were last year. Some of the major problems I see in my worst case scenario for 2009 are the following:

1. The national employment rate will reach or exceed 15%. For historical purposes, the highest rate during the Great Depression was about 25%. I expect the lay-offs to be across the board—financial, manufacturing, services, and state, local and city governmental units. Virtually no private-sector or local-government job will be secure.
2. More than 15 states will be required to borrow massive sums from the Treasury or the Federal Reserve in order to remain solvent and to maintain basic governmental services.
3. General Motors will be one of many mega Chapter 11 filings. I also expect Chrysler to file with some or all of the assets being liquidated through a Chapter 11 proceeding. Chrysler will be something for the automotive museums after 2009. Ford will have to file a Chapter 11 just to save itself from the reorganized GM. There is no other way for Ford to reduce productions expenses and still compete.
4. The number of consumer bankruptcy filings will exceed 1.5 million new cases. We will also see at least 50 major retail bankruptcy filings. According to the AOC, personal bankruptcy cases surged 30%, while business bankruptcy jumped 49%, in November of 2008 vs November of 2007. The trend in new filings is accelerating. In the third quarter of 2009, bankruptcy filings were up 60% from the year before.
5. The number of residential foreclosures will more than double the 2008 rates.
6. There will be multiple commercial real estate bankruptcy cases and 3 of the 5 major mall owners in the United States will fail. The “vacancy” rates in some of the major malls will exceed 50%. Many of the medium-sized malls will simply close. I expect around 2,500 malls to actually close. This in term should eliminate some 300,000 stores.
7. At least one of the remaining major banks will fail (my guess is Citibank).
8. More than 125 second and third tier banks will fail.
9. The price of a barrel of oil will reach at least $120 before the end of the year.
10. There will be at least 20 Chapter 9 bankruptcy cases filed by cities and county governmental units.
11. Inflation will start to become a major problem beginning in the 3rd Quarter of 2009.
12. The PGIC (Pension Government Insurance Corporation) will have to ask the Congress and/or the Fed for a major multi-billion dollar infusion. The FDIC insurance program will also need a major transfusion of Federal money.
13. At least 7 major national newspapers will fail or cease operations.
14. The number of credit card defaults will surpass all prior historical benchmarks.
15. The number of repossessions of motor vehicles will reach historical levels.
16. The motor home business (manufacturing and retail) will be virtually dead by the end of the year.
17. At least 50 of the major residential and commercial builders will fail and/or file for bankruptcy relief. It will be years before new residential construction recovers due to the number of homes that are now and will be on the market. Most of these homes are foreclosed properties now owned by the former lenders or the insurance companies.
18. More than 5,000 civil lawsuits will be filed as class actions in the federal courts by stockholders, bondholders, collateral debt holders, swap dealers, etc., with respect to the securitization of all sorts of consumer debt. This litigation will tie up the federal courts for at least 10 years.
19. At least 5 of the major debt buyers will fail due to their inability to generate sufficient revenue to fund the portfolio and future flow debt obligations.
20. Many local school systems will have to reduce the number of teaching days per year and teaching days per week.
21. The number of new homes constructed will reach historic lows.
22. New commercial real estate construction will hit historic lows.
23. The market value of existing homes will drop another 12% to 15% below current values.
24. All of the banks will cease making home equity second mortgage loans.
25. All of the banks will cease providing any home equity lines of credit secured by second or third mortgages on residential real estate.
26. Approximately 15 million more Americans will fall below the poverty line.
27. The States will have to secure additional funding from Congress to support the new unemployment claims and the Food Stamp programs.
28. Hundreds of thousands of consumers will resort to a barter market for goods and services.
29. All of the foreign automobile manufactures will suffer major layoffs in their US work forces and will announce major cutbacks in new vehicle production.
30. Lottery revenues will go down for the first time in history for a full calendar year.
31. At least 5 of the major hotel-casinos in Las Vegas will close and at least 10 will file for reorganization under Chapter 11.
32. The number of uninsured Americans will approach the 75 million mark.

Here are some of the “drastic” actions I expect the Obama administration to take in 2009:

1. Congress will be asked to impose a 90 to 120 moratorium on the foreclosure of all residential mortgage loans originated for sale on the secondary markets.
2. Congress will be asked to impose a similar moratorium for commercial mortgage loans.
3. Congress will be asked to impose a National Foreclosure Act for all residential mortgage loans originated for possible sale in interstate commerce.
4. Congress will be asked to enact legislation that will allow lawyers with student loans to write off the loans on a dollar for dollar basis to the extent the lawyers provide free legal services to consumers in foreclosure cases. The “earnings” from such representation and the cancellation of debt will be non-taxable events.
5. Congress will be asked to allow Bankruptcy Judges to modify first mortgage loans on residential real estate and second mortgage loans that are not subject to the avoidance statutes due to no value above the first. This proposed law will apply to pending as well as new Chapter 13 cases.
6. Congress will be asked to amend the Bankruptcy Code so as to regulate and control the fees and charges that mortgage servicers can collect from consumer debtors.
7. Congressed will be asked to enact a $1 trillion dollar stimulus program to provide financial aid for the creation of 3 million new infra-structure jobs and to provide funding to state and local government, banks, etc.
8. Congress will be asked to empower Fannie and Freddie to purchase distressed residential mortgage loans and to then to modify these loans by reducing the principal to current value, change the term, and reduce the interest to a low fixed rate. The foreclosure moratorium will provide the needed time to implement the necessary administrative procedures. To the extent that the loans default within a fixed period of time, or the homes are in fact sold, then the Treasury will guarantee the amount of the original face value of the note through a direct payment or a recapture procedure.
9. Congress will be asked to enact a new national health care law to be in place before October 1, 2009.
10. Congress will be asked to enact legislation that will in fact nationalize the airline industry much line Amtrak.