The landscape of American finance has been radically changed. The independent investment bank””a quintessential Wall Street animal that relied on high leverage and wholesale funding””is now all but extinct. Lehman Brothers has gone bust; Bear Stearns and Merrill Lynch have been swallowed by commercial banks; and Goldman Sachs and Morgan Stanley have become commercial banks themselves. The “shadow banking system”””the money-market funds, securities dealers, hedge funds and the other non-bank financial institutions that defined deregulated American finance””is metamorphosing at lightning speed. And in little more than three weeks America’s government, all told, expanded its gross liabilities by more than $1 trillion””almost twice as much as the cost so far of the Iraq war.

Beyond that, few things are certain. In late September the turmoil spread and intensified. Money markets seized up across the globe as banks refused to lend to each other. Five European banks failed and European governments fell over themselves to prop up their banking systems with rescues and guarantees. As this special report went to press, it was too soon to declare the crisis contained.

That crisis has its roots in the biggest housing and credit bubble in history. America’s house prices, on average, are down by almost a fifth. Many analysts expect another 10% drop across the country, which would bring the cumulative decline in nominal house prices close to that during the Depression. Other countries may fare even worse.

Read it all.

“I called just last week about one of my clients ”” they had an adjustable rate that went up to 9 percent….They could afford if it they lowered (payments) by about $200, and the bank wouldn’t even talk to us.”

—Real estate agent Lindsay Dukes from a front page article in the local paper (well worth reading in its entirety)

Watch it all.

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives ”” exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street.

Read it all.

There is no question that professionals of many nationalities ”“ bankers, financiers, estate agents and regulators ”“ behaved badly. They got paid a lot of money and wilfully loosened credit restrictions to keep house prices rising and bonuses flowing. Many of them, although far from all, were American.

But I would like to propose another culprit for the difficulty that many economies are in: you and I. We home buyers and mortgage borrowers share the blame, whether we are American, British or Icelandic.

Take nationality first. A year ago, when the US subprime mortgage debacle was evident but the British housing market was still doing well, I took a trip to London from my home in New York. On a visit to friends in west London, I was struck by the number of houses in their street with “To Let” boards outside.

At the time, there was a lot of talk about how the UK housing market differed from that of the US because it was a small island with a limited housing stock, there was no equivalent of subprime lending and so on. But those “To Let” boards said something different to me.

They showed that cheap debt and rising asset prices had led to housing speculation all over the world; it just took different forms….

Read it all.

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults — the very misfortune that touched off the credit crisis last year.

The result of homeowners being “under water” is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall….

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody’s Economy.com.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm’s chief economist, Mark Zandi, who adds that “it is very possible that there will ultimately be more homeowners under water in this period than any time in our history.”

Read it all.

Years ago, don’t ask me why, I was drawn into the moderatorship of a panel starring then-colleague Milton Friedman. His main point, iterated in the face of any criticisms or questions by panelists and audience members, was that markets succeed because, “unfettered,” they are the best expression of perfect freedom. They needed no watching or help from other spheres of life. Challenged: “Do you mean, Dr. Friedman, that there is no place where, say, the governments have a part to play in the market world?” “Roads!” The confident, one-word response sounded rehearsed. Roads have to run through private properties, subject to eminent domain. Anything else involving “others” with the “private” world? No, only “roads.”

Of course, not all advocates of “unfettered” and “unregulated” markets were as sure of themselves as Dr. Friedman, who was as informed and skillful a debater as I’ve ever known. Yet for most, governments were not to play any part in regulating or monitoring markets. Today we are hearing from many who are suddenly “born-again” advocates of some measure of regulating agencies and companies and transactions. The various sectors of society do have different interests and can mess each other up, but the headlines and prime time utterances this week indicate that, to give a secular translation of a “body of Christ” theme, “we are members one of another.” We re-learn it again, too late, during this “Worst Crisis Since 1930s,” and hope for healing.

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The nation’s celebrated rags-to-riches story began in the Nineties when free market reforms, fish quota cash and a stock market based on stable pension funds allowed Icelandic entrepreneurs to go out and sweep up international credit. Britain and Denmark were favourite shopping haunts, and in 2004 alone Icelanders spent £894m on shares in British companies. In just five years, the average Icelandic family saw its wealth increase by 45 per cent.

But, as a result of the international banking crisis, the billionaires who own everything from West Ham United football club to the Somerfield supermarket chain, Hamleys toy shops and the House of Fraser, are in trouble and the country is drowning in debt.

Iceland’s cheap labour force, the Poles and Lithuanians, have left already – there’s little point in sending home such a worthless currency, and the tourist season is over. Iceland is on its own.

Read it all.

Has the so-called Prosperity gospel turned its followers into some of the most willing participants ”” and hence, victims ”” of the current financial crisis? That’s what a scholar of the fast-growing brand of Pentecostal Christianity believes. While researching a book on black televangelism, says Jonathan Walton, a religion professor at the University of California at Riverside, he realized that Prosperity’s central promise ”” that God will “make a way” for poor people to enjoy the better things in life ”” had developed an additional, dangerous expression during the subprime-lending boom. Walton says that this encouraged congregants who got dicey mortgages to believe “God caused the bank to ignore my credit score and blessed me with my first house.” The results, he says, “were disastrous, because they pretty much turned parishioners into prey for greedy brokers.”

Others think he may be right. Says Anthea Butler, an expert in Pentecostalism at the University of Rochester in New York: “The pastor’s not gonna say, ‘Go down to Wachovia and get a loan,’ but I have heard, ‘Even if you have a poor credit rating, God can still bless you ”” if you put some faith out there [that is, make a big donation to the church], you’ll get that house or that car or that apartment.’ ” Adds J. Lee Grady, editor of the magazine Charisma: “It definitely goes on, that a preacher might say, ‘If you give this offering, God will give you a house.’ And if they did get the house, people did think that it was an answer to prayer, when in fact it was really bad banking policy.” If so, the situation offers a look at how a native-born faith built partially on American economic optimism entered into a toxic symbiosis with a pathological market.

Can we please not blame God but instead this awful theology? Read it all.

What’s occurring now is a frantic effort to prevent a modern financial disintegration that deepens the economic downturn. It’s said that the $700 billion bailout will rescue banks and other financial institutions by having the Treasury buy their suspect mortgage-backed securities. In reality, the Treasury is also bailing out the Fed, which has already — through various actions — lent financial institutions roughly $1 trillion against myriad securities. The increase in federal deposit insurance from $100,000 to $250,000 aims to discourage panicky bank withdrawals. In Europe, governments have taken similar steps; Ireland and Germany have guaranteed their banks’ deposits.

The cause of the Fed’s timidity in the 1930s remains a matter of dispute. Some scholars suggest a futile defense of the gold standard; others blame the flawed “real bills” doctrine that limited Fed lending to besieged banks. Either way, Fed Chairman Ben Bernanke, a scholar of the Depression, understands the error. The Fed’s lending and the bailout aim to avoid a ruinous credit contraction.

The economy will get worse. The housing glut endures. Cautious consumers have curbed spending. Banks and other financial institutions will suffer more losses. But these are all normal symptoms of recession. Our real vulnerability is a highly complex and global financial system that might resist rescue and revival. The Great Depression resulted from the mix of a weak economy and perverse government policies. If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedly misleading.

Read it all.

Two September shocks will define the presidency of George W. Bush. Stunningly enough, it already seems clear that the second — the financial crisis that has only begun to unfold — may well have far greater and more lasting ramifications than the terrorist attacks of Sept. 11, 2001.

That’s because while 9/11 changed the way we view the world, the current financial crisis has changed the way the world views us. And it will also change, in some very fundamental ways, the way the world works….

The current economic debacle is far more likely to be seen by historians as a true global watershed: the end of one period and the beginning of another. The financial chaos has brought down the curtain on a wide range of basic and enduring tenets also closely linked with the Reagan era, those associated with neoliberal economics, the system that the Nobel Prize-winning economist Joseph Stiglitz has called “that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently and serve the public interest well.” Already this crisis has seen not just our enemies but even some of our closest allies wondering whether we are at the beginning of the end of both American-style capitalism and of American supremacy.

Read the whole piece.

But by the time Mr. [Daniel] Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.

For a time, that decision proved profitable. In the end, it nearly destroyed the company and threatened to drag down the housing market and the economy.

Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the critical juncture when Fannie Mae’s new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink.

Read it all.

Germany said on Sunday it would guarantee all private German bank accounts ”“ currently worth €568bn ”“ in a dramatic move to prevent panic withdrawals as fears over the worldwide financial crisis spread to Europe’s largest economy.

“We want to tell people that their savings are safe,” Angela Merkel, chancellor, said at an unscheduled press conference on Sunday. The scheme would cover existing accounts and others which savers might open….

German officials said the move was agreed because of fear that the crisis at Hypo Real Estate ”“ a listed mortgage and public sector lender, whose government-backed €35bn ($48bn, £27bn) rescue collapsed at the weekend ”“ would lead to widespread panic on Monday.

Read it all.

In the case of households, debt rose from about 50% of GDP in 1980 to a peak of 100% in 2006. In other words, households now owe as much as the entire U.S. economy can produce in a year. Much of the increase in debt was used to invest in real estate. The result was a bubble; at its peak, average U.S. house prices were rising at 20% a year. Then ”” as bubbles always do ”” it burst. The S&P Case-Shiller index of house prices in 20 cities has been falling since February 2007. And the decline is accelerating. In June prices were down 16% compared with a year earlier. In some cities ”” like Phoenix and Miami ”” they have fallen by as much as a third from their peaks. The U.S. real estate market hasn’t faced anything like this since the Depression. And the pain is not over. Credit Suisse predicts that 13% of U.S. homeowners with mortgages could end up losing their homes.

Banks and other financial institutions are in an even worse position: their debts are accumulating even faster. By 2007 the financial sector’s debt was equivalent to 116% of GDP, compared with a mere 21% in 1980. And the assets the banks loaded up on have fallen even further in value than the average home ”” by as much as 55% in the case of BBB-rated mortgage-backed securities.

To date, U.S. banks have admitted to $334 billion in losses and write-downs, and the final total will almost certainly be much higher. To compensate, they have managed to raise $235 billion in new capital. The trouble is that the net loss of $99 billion implies that they will need to shrink their balance sheets by 10 times that figure ”” almost a trillion dollars ”” to maintain a constant ratio between their assets and capital. That suggests a drastic reduction of credit, since a bank’s assets are its loans. Fewer loans mean tighter business conditions on Main Street. Your local car dealer won’t be able to get the credit he needs to maintain his inventory of automobiles. To survive, he’ll have to lay off some of his employees. Expect higher unemployment nationwide.

Anyone who doubts that the U.S. is heading for recession is living in denial. On an annualized basis, real retail sales and industrial production are both declining. Unemployment is already at its highest level in five years. The question is whether we’re headed for a short, relatively mild recession like that of 2001 ”” or a latter-day version of what the world went through in the 1930s: Depression 2.0.

Read it all.

Panic was spreading on two of the scariest days ever in financial markets, and the biggest investors ”” not small investors ”” were panicking the most. Nobody was sure how much damage it would cause before it ended.

This is what a credit crisis looks like. It’s not like a stock market crisis, where the scary plunge of stocks is obvious to all. The credit crisis has played out in places most people can’t see. It’s banks refusing to lend to other banks ”” even though that is one of the most essential functions of the banking system. It’s a loss of confidence in seemingly healthy institutions like Morgan Stanley and Goldman ”” both of which reported profits even as the pressure was mounting. It is panicked hedge funds pulling out cash. It is frightened investors protecting themselves by buying credit-default swaps ”” a financial insurance policy against potential bankruptcy ”” at prices 30 times what they normally would pay.

It was this 36-hour period two weeks ago ”” from the morning of Wednesday, Sept. 17, to the afternoon of Thursday, Sept. 18 ”” that spooked policy makers by opening fissures in the worldwide financial system.

Read it all.

The Federal Reserve and U.S. Treasury continue to fail in their attempts to stabilize the U.S. financial system. That is due to failure to grasp the nature of the problem, which concerns the parallel banking system. Rescue policy remains stuck in the past, focused on the traditional banking system while ignoring the parallel unregulated system that was permitted to develop over the past twenty-five years.

This parallel banking system financed vast amounts of real estate lending and consumer borrowing. The system (which included the likes of Thornburg Mortgage, Bear Stearns and Lehman Brothers) made loans but had no deposit base. Instead, it relied on roll-over funding obtained through money markets. Additionally, it operated with little capital and extremely high leverage ratios, which was critical to its tremendous profitability. Finally, loans were usually securitized and traded among financial firms.

This business model has now proven extremely fragile. First, the model created a fundamental maturity mismatch, whereby loans were of a long term nature but funding was short-term. That left firms vulnerable to disruptions of money market funding, as has now occurred.

Second, securitization converted loans into financial instruments that could be priced according to market conditions. That was fine when prices were rising, but when they started falling firms had to take large mark-to-market losses. Given their low capital ratios, those losses quickly wiped out firms’ capital bases, thereby freezing roll-over funding.

In effect, the parallel banking business model completely lacked shock absorbers, and it has now imploded in a vicious cycle. Lack of roll-over financing has compelled asset sales, which has driven down prices. That has further eroded capital, triggering margin calls that have caused more asset sales and even lower prices, making financing impossible for even the best firms.

Read it all.

Here in the heart of Kansas, the sky isn’t falling and Chicken Little isn’t running around without a head. Community banks like mine are still making loans and serving the needs of customers.

I used to worry about competing in the world of mega “too-big-to-fail” banks. But now I know community banks offer something the monsters can never offer — real personal service. Many financial-type businesses say they offer the same thing, but they usually don’t list personal numbers in the phone book and probably aren’t driving the volunteer fire truck. My father always told me that character repaid many more debts than collateral ever would. Community banks form long-term relationships with customers.

During the farm crisis of the 1980s the over-line credits we had placed with the city correspondent banks were called. A community bank used to rely on participating loans with large metro banks. For example, if my bank had a regulatory loan limit of a million dollars and I made a two million dollar loan, I would “sell” the over-line to a large bank. These large banks suddenly suspended and called all rural credits. This is probably similar to what is happening to borrowers who use super-large banks in today’s panic environment. There was nothing wrong with these loans but every small bank suffered from this irrational wrath.

Read it all.

A successful plan to stabilize the U.S. economy and prevent a deep global recession must do more than buy back impaired debt from financial institutions. It must address the fundamental cause of the crisis: the downward spiral of house prices that devastates household wealth and destroys the capital of financial institutions that hold mortgages and mortgage-backed securities.

The recently enacted financial rescue plan does nothing to stop this spiral. Credit will not flow and liquidity will not return to the banking system until financial institutions have confidence in the solvency and liquidity of other banks.

Because of the 20% fall in the price of homes since the bursting of the house-price bubble, there are now some 10 million homes with mortgages that exceed the value of the house. Residential mortgages are generally “no recourse” loans, meaning that if the homeowner stops making payments, the creditor can take the property but cannot take other assets or attach income. Individuals with loan-to-value ratios greater than 100% therefore have an incentive to default even if they can afford their monthly payments, and to rent an apartment or other house until house prices stop declining. When individuals default and creditors foreclose, the property is added to the stock of unsold homes. That depresses prices further, increasing the number and magnitude of negative equity houses.

The prospect of a downward spiral of house prices depresses the value of mortgage-backed securities and therefore the capital and liquidity of financial institutions. Experts say that an additional 10% to 15% decline in house prices is needed to get back to the prebubble level. That decline would double the number of homes with negative equity, raising the total to 40% of all homes with mortgages. The mortgages of five million homeowners would then exceed the value of their homes by 30% or more, which could prompt millions of defaults.

Read it all.

“There is one thing necessary to understanding what is happening and it is this: no one at U.S. banks, no one at the Federal Reserve, and no one in politics can accept the reality that real estate assets in this country remain oversupplied, overpriced and overleveraged.”

“It is that simple.”

—Kevin Depew, Five Things You Need to Know: Will the Bailout Succeed

The world economy is on edge as it awaits the next round of American roulette. The US Senate has voted to create a $US700 billion ($880 billion) rescue vehicle for distressed debt. But the bill now goes to the House of Representatives, which has already rejected the idea once.

What will happen if the House says yes? And if it says no? What is the prize for winning this high-stakes game of chance? And the consequences of losing?

If you strip away the jargon, the core problem is pretty simple. There is an estimated $US2 trillion in dubious debt instruments, tied to the subprime mortgage market, outstanding at the moment. The US banks and institutions that hold them need to do one of two things – either sell them, or put a value on them in their financial statements.

At the moment, they can do neither. Why not? Because there is no functioning market. It’s not like the American sharemarket, where there are dedicated market-making firms that are charged with the job of standing in the market to buy shares, come what may.

Read it all.

The ongoing turmoil in the financial markets has diverted me from my usual tax academic pursuits, including this blog, for which I apologize. This post explores the causes of that turmoil. My next post will explore solutions currently under consideration, including aspects of the so-called “$700 billion bailout.”

The current financial crisis has many causes, some long-term and structural. I focus here, however, on three immediate aspects of the crisis: the trigger, how problems generated by that trigger spread through the markets, and how this produced the liquidity freeze that persuaded Mr. Paulson and Mr. Bush to act (unsuccessfully thus far).

Read it all. This is a pretty good basic analysis. It is missing some important pieces, especially the 1999 decision to expand Fannie Mae and Freddie Mac’s purview and the role that had in encouraging more risky mortgages. Also, I disagree with him about Lehman, he is way too kind– it was a big mistake by the Fed. More about credit default swaps would have helped too.

Anyway, you take a look and see what you think–KSH.

What should Congress do now?

First, rescue the money markets and the toxic securities by refinancing the underlying mortgages — rather than bailing out the banks. In the Great Depression, Franklin Roosevelt’s Home Owners Loan Corp., a branch of the government, refinanced one out of every five mortgages. Roosevelt’s administration saved about 1 million Americans from foreclosure. No middlemen got rich.

If we can stop the wave of foreclosures, we brake the collapse in housing prices. The bondholders would get bought out at so many cents on the dollar, just as they would have in the Paulson plan. But with the Kuttner plan, homeowners are the primary beneficiaries. Under Paulson’s approach, the bondholders get bailed out but many homeowners still lose their home or keep paying Mafia mortgage rates. It’s just what you’d expect from a guy who still operates as if he were the chief executive of Goldman Sachs — which Paulson once was.

Second difference: The government should take over failing banks directly and get rid of toxic executives as well as the toxic investments they made.

Read both pieces carefully.

[BOB] ABERNETHY: Father Martin, just step back just a minute and, quickly, what are the big lessons here about, maybe, things that go beyond just the bailout itself?

Fr. [JIM] MARTIN: Well, I think one thing is that, you know, these assets were highly valued because they were risky. In economics there’s a risk-return relationship, and I think one of the things we see that hasn’t been commented on is just that the CEOs sort of lost the sense of personal responsibility to their investors and, you know, to the people they were giving mortgages to. I mean, you know, you check out a lot of magazines in the past few months, they were talking about the coming collapse. It’s not, you know, it’s not as if people didn’t know this was going to happen, and yet the investment was still being made. So I think there’s a certain level, I agree with Jim Wallis, of personal responsibility that needs to be accepted by the CEOs. So in other words what I’m saying is it points out is that, you know, people really do have the responsibility for making conscientious decisions in the workplace.

[BOB] ABERNETHY: Jim Wallis, quickly.

Rev. [JIM] WALLIS: I think there’s an opportunity here for redemption. If our congregations begin to look at these questions — we ought to have adult Sunday school curriculum on money and how to be responsible in our economic lives. That could be a real opportunity for the pulpit to get involved here and start talking about what Christians and Jews and Muslims ought to do in responsible ways about how they live.

Read or watch it all.

Under the agreement, Citigroup will absorb up to $42B of losses on a $312B pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12B in preferred stock and warrants to compensate the FDIC for bearing this risk. In consultation with the President, the Secretary of the Treasury on the recommendation of the Federal Reserve and FDIC determined that open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability.

This is so typical of this nightmarish crisis we are in. Wachovia closed Friday at 10, and now it is pricing near 2. Because of the mess of what is really on these financial institutions balance sheets, no one knows what they are actually worth. Why would banks want to lend other banks when a bank like Wachovia can have this occur so quickly? How do they know that the bank they are lending to is not another Wachovia–KSH?

Update: A NY Times article is now here.

But we should be under no illusions that, even if it works as well as its authors hope (a large aspiration), it is already too late to avert a serious economic downturn ”” not just for the US, but for the world and, like the residents of New Orleans that fateful weekend three years ago, we seem ill-prepared for what is about to hit us.

I say this with great reluctance. It is no business of journalists (who, as someone once said, are like harlots, who wield power without responsibility) to go around scaring people. What’s more, until a few months ago I’ve been a relative optimist, convinced that we would get through this with not much worse than the kind of mild recession we’ve seen in the past 20 years. Now I think it might be time to panic.

The US is already in a recession that, even if financial conditions returned to normal today, would still be very unpleasant. In the quarter that ends tomorrow, it seems almost certain that US total output declined. Consumer spending and investment have been alarmingly weak in the past two months. On Friday we are quite likely to get another depressing report on the labour market, expected to show the ninth straight month of job declines in September. The housing market still seems to be getting worse, with sales falling faster than new construction, adding to the excess supply.

Britain’s economic activity is already declining, as is that of most of the big eurozone countries. So much for “decoupling”. We may have got into this predicament by different routes, but we’re all going the same way.

Read it all.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected ”” and astonishingly fragile ”” financial world that began to implode in recent weeks.

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators ”” sometimes even beyond the understanding of executives peddling them.

Read it all.

That would be New York City’s Nehemiah program. The program started about 30 years ago by several church groups in the Bronx who saw row after row of desolation and sought to change it.

The groups set forth strict income guidelines to make sure that the homeowners had a sense of ownership over the homes and that they would fulfill their obligations. Those guidelines mean people are less likely to get in over their heads:

In the 27 years since the program started, fewer than 10 of the 3,900 households have defaulted on mortgages, a rate that is close to zero, said Michael Gecan, a senior organizer with the Metro Industrial Areas Foundation, one of the forces behind the program.

“We demanded down payments,” Mr. Gecan said, “and we resisted government attempts to have us waive down payments. Over the last six or eight years people kept suggesting various programs with zero down. We kept saying, ”˜That’s ridiculous ”” that’s how you get into mass foreclosures.’”

Read it all.

After a marathon round of negotiations that ended in the predawn hours on Saturday, Congressional leaders and Bush administration officials said they were nearing consensus on a $700 billion rescue plan for the nation’s financial system, and that a deal might be announced Sunday evening before the markets open in Asia….

On the bailout, Mr. Reid said, “We hope that sometime tomorrow evening we can announce there has been some kind of agreement in principle,” adding that it was crucial to send a reassuring message to the financial markets. “We may not have another day.”

Senator Judd Gregg, Republican of New Hampshire, who is the lead negotiator for Senate Republicans, also said there was an urgent need for action: “Failure to do this will lead to a massive fiscal meltdown in the credit markets, which will lead immediately to a meltdown on Main Street.”

Read it all.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Read it carefully and read it all.

JOE [KERNEN]: But when the more dire it looked, in terms of communicating, with some of these Senators, the three-month or one-month bill, again, started acting similar to what was happening on Thursday[of last week]. Now we averted that disaster on Thursday, but it’s already been three or four days. It’s almost as if these guys already forgot about the position that we were in. Do you think that accounted — we’re still susceptible to that happening again if it looked like they’re not going to go through with this?

[WARREN] BUFFETT: No, it would get worse. Last week will look like Nirvana (laughs) if they don’t do something. I think they will. I understand where they’re very mad about what’s happened in the past, but this isn’t the time to vent your spleen about that. This is the time to do something that gets this country back on the right track. What you have, Joe, you have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they’re trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that’s willing to leverage up. And there’s no one that can leverage up except the United States government. And what they’re talking about is leveraging up to the tune of 700 billion, to in effect, offset the deleveraging that’s going on through all the financial institutions. And I might add, if they do it right, and I think they will do it reasonably right, they won’t do it perfectly right, I think they’ll make a lot of money. Because if they don’t — they shouldn’t buy these debt instruments at what the institutions paid. They shouldn’t buy them at what they’re carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

—From a CNBC interview yesterday (all three parts of which are worth the time)