$700 Billion Bailout: The Emergency Economic Stabilization ACT and What It Means to You, Your Money, Your Mortgage, and Your Taxes

Most of the Emergency Economic Stabilization Act (EESA - $700 million) consists of 300 pages (out of a 451 page total) of tax breaks for businesses and consumers that have nothing to do with the mortgage and credit crisis. The act originated as a three-page memo, failed in the House on its first vote (110 pages then), and in its final version also gave the Treasury power to bail out counties, cities, pension funds, and foreign banks suffering increased costs or losses. At the time that EESA was passed, there were $44 trillion of CDS outstanding - totally unregulated. The national delinquency rate for the $1 trillion in sub-prime mortgages is now about 35%; there are also about $400 billion in Alt-A, another $800 billion in home-equity loans, and an unreported amount of ARMs. "Toxic" mortgages are believed to be worth, on average, about 60 cents on the dollar, with about 20 cents offered. (No explanation for the difference.) Muolo believes that total losses will run about $1 trillion, with only half recognized by holding entities so far. Fannie Mae and Freddie Mac together own about 18% ($180 billion) of mortgage bonds backed by sub-prime loans, as well as $1.4 trillion in home mortgages, while guaranteeing still another $4.2 trillion. TARP spent $250 billion to buy stakes in large, and small and mid-size banks (about half in each). Seven of the nine large banks didn't want to participate - it was done for psychological means to show that American banks are strong. Legal costs alone for foreclosure run about $15-20,000; also the lost monthly payments, and damages caused by irate occupants who were forced out, plus vandals and thieves. Down payment assistance programs are no longer allowed - found they went bad much faster than mortgages without. Tax breaks included in the EESA focused on renewable energy - wind, refined coal, biomass, disposing of CO2, idle-reduction units on trucks, energy-efficient appliances, and some NASCAR etc. facilities. The bill also extended tax credits for solar energy, small windmills, plug-in electric cars, etc. "Cram-downs" did not make it into EESA - mortgage-industry lobbyists did not like giving bankruptcy judges that authority to modify mortgages. Recommendations: Bring back Glass-Steagall (repealed in 1999, led by Sen. Gramm), regulate the CDS market and hedge funds as well.

Paul Muolo provides a clear and apparently fair and balanced explanation of how it would have been practically impossible for the Fannie Mae, Freddie Mac and the banks to inflate the housing bubble to such a monstrous size if Standard & Poor's, Moody's and Fitch hand not inflated their ratings on all those mortgage bonds. But how big is the bubble? On page 50 the author estimates that homes mainly in the southwest and Florida could lose 50 percent in value. What about the rest of the country? My own personal data (contained in my book "How to Invest in Condominiums") and experience in Seattle indicates that the problem is more widespread. A 50 percent estimate also applies to the Pacific North West if a longer time period is considered. In Seattle in the late 1970's you could buy new condominiums for a price that was about seven times the gross annual rent. I stopped buying real estate in the 1980's when I could not get a price close to my recommended target price of seven times the gross annual rent. The bubble was beginning to inflate. If millions of other real estate buyers had stopped buying because housing prices were getting outrageously high relative to imputed rents it is difficult to imagine how the bubble could have continued to grow. Now the bubble has supposedly burst, but yet the minimum selling price at condominium auctions (and they do sell rapidly) are set at about fourteen (14) times the gross annual rent. Twice what was "normal" in the late 1970's. Seattle, of course, is not the whole country but almost everyday there are indications that the panic is getting bigger. Weeks ago the government thought they could stop the panic with a $750 billion injection of capital. This crisis is moving so fast that this book published in 2009 is rapidly getting out of date. Microsoft is laying of people (5000) for the first time in it's history. And now in senate hearings you hear the number $4 trillion to buy from the banks all the "toxic assets" (a scary label for over-priced real estate used in times of panic). Some economists worry that this massive amount of spending could totally destabilize the dollar. The Inauguration's main theme was hope. But the stock market responded with a crescendo of fear. It fell 332 points, the worst Inauguration Day sell off in 113 years. I subtract one star for the fact that half the book is consists of "Excerpts from the Emergency Economic Stabilization Act of 2008" (page-count inflation) and there is no index.

Whenever any financial or political issue becomes too big and too complex, I always look for two things: Number one. of course, is - the ANSWER or the PROCESS for getting to resolve. Number two, and just as important is - someone to explain what happened and how it affects my family. Muolo satisfies my curiousity and my understanding in his very comprehensible writing style. Not only that, but the excellent short descriptions in the glossary really helped me "get it". I honestly feel I'm at the ground floor and better understand the issues whenever I get news updates or listen to the speeches and panels. I understand "why" the mortgage crisis happened and what we're doing through oversight and enactment of powers through the Treasury to fix it. Most enlightening in the book? explanation on how the Gramm-Leach-Bliley Act is a main factor in allowing this to occur. I am an active real estate investor and this really helps me understand what we investors are up against over the next 5 years.

Paul Muolo has a track record of analyzing an economic situation with well informed research and depth of thinking. The same goes here. Extremely well written and well thought out, easy to read, very assessible--congrats to Muolo for a job well done. This is a book every American should buy and read--in fact, every taxpayer! I hope the author does a sequel to it a year from now asking the hard questions about accountability in the bailout, who made the money, where'd it go, and how'd it really benefit the rest of us. Looking forward to seeing this book do very well, as it should.

After enjoying the author's previous tome, Chain of Blame, I was interested in following how sub prime mortgage crisis would be handled. This is your guide to how the bailout money's to be spent and what that will mean to the individual. Like Muolo's last one, a truly fascinating read, and made all the more poignant because we're in the middle of this mess right now. Extremely well-written, with detailed analysis of all the main points, and easy to understand without being too scholarly. Kudos again to the author!