• In 1971 Congress created a worthy project with noble intentions - the Community Reinvestment Act (CRA). Over strong industry objections, it mandated that all banks meet the credit needs of their entire communities.
• 1995 saw stronger regulations and performance tests that coerced banks to substantially increase loans to low-income, poverty-area borrowers or face fines or possible restrictions on expansion. These revisions allowed for secularization of CRA loans containing subprime mortgages.
• By 1997, greedy bankers started bundling good loans with poor ones and sold them as prime packages to institutions here and abroad. That shifted risk from the loan originators, freeing banks to begin pyramiding and making more of these profitable subprime products.
• Fannie Mae and Freddie Mac joined in the "greed fest." By 2003, these "quasi-governmental agencies" had $1.5 trillion in outstanding debt and a bill was proposed to "rein" things in.
• In 2005 a bill was proposed to "bring some oversight to Fannie and Freddie," but political bickering and influence peddling blocked its passage. Fannie and Freddie continued to issue loans that had little chance of surviving foreclosure in a down housing market.
• These subprime products have now permeated the entire world economy.
• Early in 2008, a new accounting rule required companies to “mark-to-market” (more below) all securities and thus take some $535 billion of write-downs in assets. This scared the hell out of investors and they reacted accordingly.

• When borrowers got loans, the banks typically sold these loans to Wall Street firms, who then repackaged them as bonds backed by the value of a house or property. Wall Street then sold these bonds to mutual funds, pension funds and all sorts of investors around the globe.
• As house prices dropped in value, so did the value of these bonds, which vary in type as mortgage-backed securities, collateralized debt obligations (CDOs), even CDOs of credit default swaps or exotic bonds called CDO-squareds.
• The accounting rule says that companies that own these bonds must value these bonds each quarter as if they were going to be sold immediately. That process is called “mark to market.”
• But since these bonds have dropped in value, no one wants them.
• Companies must then book losses on these bonds even if they did not sell them.
• “Mark to market” has since been jokingly called “mark to mayhem” and “mark to madness.” The SEC is studying the role mark-to-market accounting had in the failures and troubles at big U.S. banks. The study was authorized as part of the $700 billion rescue plan.

WHAT NOW? - To restore confidence in the banking system, the U.S. Treasury Department is weighing using at least some of the $700 billion rescue fund to take ownership stakes in some banks. Banks could request a capital injection from the Treasury in return for ownership positions. Doing so would strengthen the banks' balance sheets and could prompt them to begin lending again.  Here are a couple of articles you may want to review:  U.S. Treasury May Buy Stakes in Banks (Bloomberg) and Paulson 'actively' eyes bank investment (CNNMoney.com).   

WHAT ELSE? - Commercial paper is a form of short-term funding that's critical to many business operations.  In other words, these are short-term business loans that many businesses use to pay their everyday operating expenses.  With the market in commercial paper freezing up, the Federal Reserve announced a new program under which the Fed will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers.  This is as close as the government has come to lending directly to businesses.

A BEGINNING SOLUTION? - At this point it seems highly doubtful that the $700 billion rescue package will be successful, at least on its own.  What will work?  First off, it's important to understand that we're dealing with an interconnected web of global financial relationships, meaning that everyone is at risk, not just a single nation. While our leaders in Washington are thinking domestically, the solution to the credit crisis must be global. Secondly, simply throwing money at the problem may not work. The world does not lack money.  Instead, trillions of dollars of the world's money is sitting on the sidelines, not being put to productive use. The challenge is to fashion solutions/reforms that will draw global capital off the sidelines and back into productive use.  Remember, short of nationalizing the banks, there is nothing the federal government can do to force banks to lend.  The first step in a true rescue may well be to make the market for future asset-backed securities more transparent and credible, thus restoring trust so that the bankers will start lending again.

STILL POSSIBLE? – Instead of this “Common Sense” approach (1 page) from Dave Ramsey, on a bipartisan basis our government elected to pass a 451-page bill and create a $700 billion plan with another $150 billion tax breaks thrown in. Do we have a chance to see a common sense approach?  Doubtful since the current president and both presidential candidates seem “bound and determined” to simply throw cash at the problem. That is sure easy when the money isn't yours! This is not a time for envy, and it's not a time for politics. It's time for all of us, as Americans, to stand up, speak out, and fix this mess.  

FED CUTS RATES – In a unprecedented move and an attempt to stave off fear on Wall Street, the Fed cut its fed funds rate to 1.5%. The cut from 2% took the rate to its lowest level in more than four years. Unfortunately, fear seems to still be around as the market fluctuates, but continues a steady downward tend.

INTEREST RATES CUT WORLD WIDE – In an effort to stave off a global collapse, central banks in China, Hong Kong, South Korea and Taiwan joined their Western counterparts (England, Canada, Sweden and Switzerland and the European Central Bank) in reducing interest rates in a coordinated effort to prevent the credit crisis from potentially triggering a global recession. Markets in the U.S., the U.K. and Europe continued to drop after the cuts were announced, but Asian markets temporarily made conservative gains.

GREENSPAN AND DERIVATIVES - Former Fed Chairman Alan Greenspan's longtime enthusiasm for derivatives and opposition to their regulation is coming under scrutiny since many believe these complex and difficult-to-analyze securities fueled the current economic crisis. Greenspan claims the problem is not that derivative contracts failed, but that the people using them got greedy. Well, Alan, what about your opposition to their regulation?

GRIM REMINDERS - These two events may put into perspective just how grim things have gotten:  Just a little over a year ago, on October 9, 2007, the Dow Jones Industrial Average hit its all-time peak of 14,168.53.  On October 9, 2008, the Dow closed at 9,258.1, a 34.7% decline from just a year earlier.  Here's the second "goodie":  The National Debt Clock in New York City has run out of digits to record the growing debt, currently around $10.2 trillion.  In response, the dollar sign has been switched to a digit.

WELLS FARGO IN, CITIBANK OUT - Move one: Citi announced that it was purchasing Wachovia's banking assets.  Move two: Wells Fargo made an offer to buy all of Wachovia.  Move three:  Citi charged Wells Fargo with "tortious interference" and threatened to sue.  Move four:  Citi and Wells sat down to talk things through.  Move five: Citi walked away from the deal, giving Wells Fargo a green light to buy Wachovia.  Possible move six:  Citi says it will pursue a $60 billion claim against Wells Fargo and Wachovia for breeching the initial agreement.

INSURANCE CONSOLIDATION - With insurer's share values sinking over concern about their capital needs in the midst of the current credit crisis, we may see an increase in merger activity.  Hartford appears to be in the forefront right now. Early last week, Allianz invested $2.5 billion in Hartford, with Hartford taking pains to explain that it was simply an investment, not a prelude to a takeover by Allianz.  Then, later in the week, reports surfaced that MetLife had approached Hartford about a merger.

READING ROOM - Here are a number of articles we found interesting:

• The Blame Game Begins (Forbes) 
• Deleveraging, A Fate Worse Than Debt (Economist) 
• The End of American Capitalism? (Washington Post) 
• Wall Street's Latest Crisis of Leadership (BusinessWeek) 
• The End of Prosperity? (Time) 
• Buffett: My fix for the economy (Fortune) 

• A new AMT "patch" is in place for 2008.  This year, AMT exemption amounts are $69,950 for married couples filing jointly, $46,200 for single and head of household taxpayers and $34,975 for married couples filing separately.
• The state and local sales tax deduction has been extended though 2009.
• The $4,000 qualified tuition deduction has also been extended through 2009, as has the $250 teachers' classroom expense deduction.
• Taxpayers can make tax-free distributions from IRAs to charities through 2009.
• The child tax credit was enhanced by making it refundable to the extent of 15% of a taxpayer's earned income in excess of $8,500 (instead of the previous $12,050).
• The additional standard deduction available to non-itemizers for real property taxes was extended through 2009.