Proposed 28th Amendment to the United States Constitution:

“Congress shall make no law that applies to the citizens of the United States that does not apply equally to the Senators and/or Representatives, and Congress shall make no law that applies to the Senators and/or Representatives that does not apply equally to the citizens of the United States.”

When he was merely “Candidate Obama”, President Obama repeatedly stated his disdain for the continued wasteful spending by Washington lawmaker’s.  For too long, Washington politicians have wasted billions of our hard earned tax dollars on pork barrel projects and redundant or outdated programs that directly benefit the constituents of the submitting Congressman, but have virtually no beneficial impact on the collective American population.  During their campaign, Barack Obama and Joe Biden pledged to make the federal government more efficient from top-to-bottom. President-elect Barack Obama pledged to cut wasteful and ineffective programs and vowed to bar lawmakers’ pet projects from his massive economic stimulus plan.  Moreover, he promised to bring unprecedented accountability to federal spending.

As recently as January, just prior to taking office, then President Elect Obama affirmed his campaign promises, declaring that his stimulus plan will set a “new higher standard of accountability, transparency and oversight. Again, President Elect Obama [vowed] to ban all earmarks, the process by which individual members insert projects without review.”

The House last week passed the measure that would finance the government through the end of the federal fiscal calendar, notably September 30, 2009. In that budget, almost 8,600 specially sponsored projects (otherwise known as earmarks) totaling $7.7 billion have been identified.

True to governmental form, Obama’s closest advisors assigned responsibility to the outgoing administration.  In response to criticism for Obama’s support of this budget proposal, his cabinet blames former President George W. Bush for the massive deficit left for the  Obama administration to fix.   Obama administration budget chief Peter Orszag and White House chief of staff Rahm Emanuel minimized the inconsistencies between the President’s campaign promises and his current actions when he signs this bill.   Falling back into old school politics, Orszag claimed signing this bill was necessary to “move forward” and further stating that signing this bill is a necessary precursor to “move on”.

The first step to instilling integrity into our American system of government and politics is demonstrating one’s ability to continually strive to make the correct decisions, even when unpopular, as well as maintaining one’s commitment to keeping one’s word.   The lack of confidence in our political representatives is directly related to the insignificance our elected representatives attach to their own campaign promises.  Getting things done in our system of government takes hard work, perseverance, and the willingness to cooperate, communicate, and concede when necessary.  However, the desire to make a change in American politics takes an unyielding desire to stand up and do what is right, even when that decision is unpopular. “The one thing that doesn’t abide by majority rule is a person’s conscience”, as spoken by an American legal folk hero Atticus Finch, was never more appropriate.

By signing this bill, President Obama will show the American public who appointed him that his campaign promises are meaningless.  By allowing his closest advisors to downplay the significance of the approval by the President of this bill and blaming the proceeding Administration, Obama has minimized and trivialized the Presidents influence, power and ultimately legitimacy.

President Obama has the power in his pen to refuse to sign a bill that does not reflect the promises he made to the American public.  Our President is not permitted to shrug his shoulders and shun his responsibility by simply assigning blame to a previous administration.  At the end of the day, and for the rest of history, President OBAMA’S signature will be attached to this massive bill.  Future historians will not find the signature or influence of George W. Bush on the spending bill of 2009.

Mr. Obama should teach the elected representatives, the impressionable youth of America and the international global community at large that when a person makes a promise, his honor, integrity and character are on the line.  If America is to retake our position of global hegemony, we have to start living up to the promises we make.  We cannot simply shun our responsibility by blaming others for our actions.  To ensure his legacy ends as brightly as his Presidency began, Mr. Obama should prove to the American people that his campaign promises were more than merely lip service, and that his veto power is the power to ensure integrity reigns in our political system.

President Barack Obama and the Democrat controlled Congress are considering sweeping legislation that will provide new benefits for many Americans. The Americans With No Abilities Act (AWNAA) is being hailed as a major legislative goal by advocates of the millions of Americans who lack any real skills or ambition.

“Roughly 50 percent of Americans do not possess the competence and drive necessary to carve out a meaningful role for themselves in society,” said California Senator Barbara Boxer - Democrat. “We can no longer stand by and allow People of Inability (POI) to be ridiculed and passed over. With this legislation, employers will no longer be able to grant special favors to a small group of workers, simply because they have some idea of what they are doing.”

In a Capitol Hill press conference, House Majority Leader Nancy Pelosi - Democrat,  and Senate Majority Leader Harry Reid - Democrat - pointed to the success of the U.S. Postal Service, which has a long-standing policy of providing opportunity without regard to performance. Approximately 74 percent of postal employees lack any job skills, making this agency the single largest U.S. employer of Persons of Inability.

Private-sector industries with good records of non-discrimination against the Inept include retail sales (72%), the airline industry (68%), and home improvement warehouse stores (65%). At the state government level, the Department of Motor Vehicles also has an excellent record of hiring Persons of Inability (63%).

Under AWNAA, more than 25 million mid-level positions will be created, with important-sounding titles but little real responsibility, thus providing an illusory sense of purpose and performance.

Mandatory non-performance-based raises and promotions will be given so as to guarantee upward mobility for even the most unremarkable employees. The legislation provides substantial tax breaks to corporations that promote a significant number of Persons of Inability into middle-management positions, and gives a tax credit to small and medium-sized businesses that agree to hire one clueless worker for every two talented hires.

Finally, the AWNAA contains tough new measures to make it more difficult to discriminate against the non-abled, banning, for example, discriminatory interview questions such as, “Do you have any skills or experience that relate to this job?”

“As a Non-abled person, I can’t be expected to keep up with people who have something going for them,”said Mary Lou Gertz, who lost her position as a lug-nut twister at the GM plant in Flint , Michigan , due to her inability to remember rightey tightey, lefty loosey.”This new law should be real good for people like me,” Gertz added. With the passage of this bill, Gertz and millions of other untalented citizens will finally see a light at the end of the tunnel.

Said Senator Dick Durbin (Democrat-IL), “As a Senator with no abilities, I believe the same privileges that elected officials enjoy ought to be extended to every American with no abilities. It is our duty as lawmakers to provide each and every American citizen, regardless of his or her inadequacy, with some sort of space to take up in this great nation and a good salary for doing so.”
By Paul O’Neill

This document provides an economically responsible and realistic solution that was ignored in the frenzy of the last actions of an exiting administration.

Mr. Houston and I have first hand knowledge of the banking sectors’ unwillingness to take losses and liquidate their non-performing assets. There have been an innumerable amount of investors standing in line offering to buy billions of non-performing REO assets from the banks holding the properties. These investors are simply seeking to assume the risk and gain any potential profit in converting non-performing assets into fully performing investments.

The greed of the banking sector prevailed as banks were unwilling to liquidate their REO holdings for relatively small realized losses. The banks refused offers by fund managers, portfolio managers and individual investors to purchase both individual properties as well as bulk REO portfolios at 50-75 cents on the dollar. The banks to date have refused to liquidate their losses at any amount below 80-95 cents on the dollar. Thus plunging the credit market into what the banks conveniently and erroneously label “liquidity problems”. Lack of liquidity implies there are no willing buyers for a willing seller. The current “lack of liquidity” in the housing market is simply a result of the banks unwillingness to sell their REO holdings to the market at current market prices. Today’s prices are deemed “too low” by the banks. Selling at the current bid price requires the banks to take a loss on their investment as a result of their poor and irresponsible investment underwriting. Instead of realizing these losses, the banks sought and received a governmental bailout on the backs of the U.S. taxpayer.

The undeniable facts are as follows:

• The banks assumed the U.S. government would deem them “too big to fail” and thus bail them out. As a result, the banks refused to sell off their non-performing assets at reduced prices 2-3 years ago, when today’s crisis first became inevitable.
• By not selling off these assets and taking the corporate loss two years ago, the banks enhanced the catastrophic losses they now face. They knowingly placed the American taxpayer and the financial markets at risk without regard to basic fundamentals of risk and portfolio management.
• The U.S. government is rewarding the banks, and indirectly their share-holders, for breach of fiduciary duties owed by banking executives to the general public, for their lack of prudent financial and investment decision-making, and for refusal to minimize the losses as a result of a history of governmental willingness to intervene and bail out the banking industry.

The Problem

So, let’s assume we all understand what the problem is. (For a more detailed understanding, see Letter from Leo W. Gerard, President of the United Steelworkers Union, to Treasury Secretary Paulsen, dated October 28, 2008) In a nutshell, Mr. Gerard’s argument in his letter to Secretary Paulson is that the Secretary failed to exercise sound judgment in valuing the assets for which he was committing taxpayer dollars. Just twenty days before Goldman announced that it would “accept” Treasury’s investment; Warren Buffett invested $5 billion into Goldman Sachs and acquired the very same type of security – preferred stock – with the very same form of “upside” – warrants to purchase common stock. Per dollar invested, Mr. Buffett received at least seven and perhaps up to fourteen times more warrants than Treasury Paulson did and Mr. Buffett’s warrants have more favorable terms. In addition, Mr. Buffett’s preferred stock has a higher dividend rate and can only be bought away from him at a premium, while Treasury’s investment of taxpayers’ money pays a lower dividend and can be repurchased at par.

Mr. Gerard argues the Treasury paid $125 billion for securities for which a disinterested party would have paid $62.5 billion. This means that we, as taxpayers, gifted the other $62.5 billion to the shareholders of the largest nine banking institutions. Even worse, it is expected that the nearly $25 billion per year that the firms pay out in dividends to their shareholders will continue. At current levels, dividends to shareholders will distribute all of the money we invested in just five years.

Out in the real economy, we need to restore the balance of power between workers and business, rebuild the middle class and curb corporate excesses. We need to get the government OUT of the business of running corporate America and prevent our tax dollars going to pay for the inefficiencies of Washington. Our politicians are freely spending our tax dollars to “bail out” a troubled sector without establishing any sort of “conditions” of acceptance of such financial assistance. The $700 billion dollar taxpayer investment does NOTHING to deal with the causes of the current crisis. In response, I propose a solution…

The Proposed Solution

To solve the problem, we should start by halting any more taxpayer funds paid to any of the banks. We should mandate the banks liquidate a portion of their REO (Real Estate Owned, e.g. foreclosed homes that are now bank held properties) inventory holdings within 180 days.  Any REO that has been on the books of the banks for longer than 200 hundred days must be liquidated within 60 days.

By requiring the banks to liquidate REO holdings, the banks are then forced to eliminate non-performing assets from their balance sheets. Liquidating REO’s will inject the supply of houses back into the market.  The banks are forced to take actual losses on the poor investments they made.  The banks are then placed in the same position as any other investor when a trade goes against their interest. Liquidating REO’s converts a non-performing asset into a performing asset in the capital market.  By doing this there will be a shift of the risk of fluctuating (or further declines) in housing prices from the banks (who traditionally do NOT like assuming risk) to the market and investing public. Traditionally, banks do NOT like to assume undetermined risk. Furthermore, the marketplace exists to shift risk to the investor and has been the most efficient place to control and manage risk.

In addition, by liquidating REO’s and getting them into the hands of willing investors, the banks would recover some of their losses when the purchasers of these homes seek mortgage financing for their newly acquired asset.  This action has a multiplier effect, spurring investment dollars rolling back through the bank and the financial system.  The banks now would be converting non-performing assets into new loan generation profits.  By taking an initial loss, the banks will be rewarded with revenues in the form of interest rate returns on their lending dollars.  This solution prevents the tax payers from being forced to bail out banks who made poor investment decisions. This action also has the added benefit of putting the risky investments back into the hands of those most willing and efficient at handling such risk. The purchase price received on REOs will reflect the increase risk the market must assume as a consequence to increased risk.

Another benefit of my proposed solution is that the taxpayers are actually the catalyst for returning the median housing price to parity.  The “housing bubble” has resulted in unsustainable housing prices over the past 10 years. Increases in home prices typically keep pace with increases in wages. However, the housing price increases of the last ten years have outpaced increases in wages. National median home prices have increased by more than 45 percent in the last decade (when adjusted for inflation). Median wages per worker, on the other hand, have only increased by 10 percent in the same period. As a result, individuals who are making the median household income cannot afford to buy a median priced home. My solution returns parity to the housing market and permits more homebuyers in the market, thus resulting in more mortgage lending dollars. This is another benefit of the multiplier effect of forcing the banks to take immediate losses on their REO’s in an effort to gain long term profits and benefits from the capitalist markets.

What my solution does NOT include is as important as what it does.  Notice, my solution does not require the government to spend money on ANYTHING. The government is merely required to force the banks (e.g. REGULATE) to liquidate their non-performing assets and take the loss on investments that have already been realized on their books. In other words, this solution forces the banks to turn unrealized, paper losses into actual, realized losses. Although the banks are fearful of taking such huge losses, prudent risk management dictates that every investor must first seek self-preservation. Self-preservation means preservation of capital by liquidating losing trades before your trading account is liquidated.

Interestingly, when not subsidized by a large governmental body or bank account, every investor in the world is forced to manage their risk and take losses before losses overtake their capital account.  A general rule of thumb of investing is “take your losses and let your profits run”.  What this adage means is that you should allow your profits to continue to gain, but you must keep your losses to a minimum. This is also known to the layperson as “playing with house money”. The rationale behind it is that you must never allow your small, manageable losses to become large, unmanageable losses that jeopardize your future ability to invest or trade. See the results of large scale trading failures resulting in liquidating entire corporations

Eerily, almost 10 years ago, Kevin Dowd, a professor of economics at the University of Sheffield and an adjunct scholar at the Cato Institute (a Libertarian think tank based on the principles of limited government, free markets, individual liberty, and peace) wrote about the dangers of governmental intervention in a similar financial crisis. (See Too Big to Fail? Long-Term Capital Management and the Federal Reserve, September 23, 1999). In September 1998 the Federal Reserve organized a rescue of Long-Term Capital Management (LTCM), a very large and prominent hedge fund on the brink of failure. The Fed intervened because it was concerned about possible dire consequences for world financial markets if it allowed the hedge fund to fail. In the short run the intervention helped the shareholders and managers of LTCM to get a better deal for them than they would otherwise have obtained. The intervention also had more serious long-term consequences: it encouraged more calls for the regulation of hedge-fund activity, which may drive such activity further offshore; it implied a major open-ended extension of Federal Reserve responsibilities, without any congressional authorization; it implied a return to the discredited doctrine that the Fed should prevent the failure of large financial firms, which encouraged irresponsible risk taking; and it undermined the moral authority of Fed policymakers in their efforts to encourage their counterparts in other countries to persevere with the difficult process of economic liberalization.

History that we fail to understand or keep at the forefront of our memory, is destined to repeat itself. Recently, the Federal Reserve, the Treasure Department and the Executive Branch of our government have deemed certain industry participants as “Too big to fail”, for fear of the larger implications if such industries or corporations are allowed to become non-existent. What is often overlooked is the fact that market capitalism will always fill voids and gaps in the market. One corporations’ failure and subsequent void results in another corporations’ opportunity to step in and replace the failed entity. Where large banks were willing to over-reach their hand in pursuit of never ending greed and profits, and getting that hand cut off in the process, smaller regional banks, some privately held “mom and pop” operations, were forced to be selective and more conservative in their lending practices. These regional niche banks are largely not as negatively affected to of the failed investment decisions of their larger conglomerate competition. It is these smaller banks who are poised to reap the reward of their conservative investment decision-making. Smaller banks will step up to fill the void left by failed conglomerates.

Unfortunately, the banking sector has been erroneously practicing the philosophy of “take your profits and let your losses run”. Add to that “don’t waste the edge with a hedge” and you have a recipe for large scale financial disaster. Unfortunately for the large, ill-advised banks, the losses have become so large, the government has once again deemed them “too big to fail”.  Our government has once again fallen into the trap and repeated the mistakes of a decade ago. We have failed to learn from our mistakes which make us even more likely to repeat them yet again.

By protecting the large institutions from accepting their losses, the banks are permitted to essentially ignore those losses and continue to act as irrational actors in the market. For example, banks facing large inventories of REO’s, inventories which are growing on a monthly basis, have feared the day that they had to liquidate such listings in a fire sale and actually preserve their equity. By stepping in and bailing the banks out of their financial nightmare, the federal government (e.g. you and I as taxpayers) have assumed the risk incurred by the banks. The banks now essentially have not felt any of their losses as they have been alleviated of the necessity to liquidate losing positions. What this means is that REO’s that have been sitting on their books, depreciating every month for the past 11 months of 2008, now have been injected with fresh taxpayer capital. The banks can now continue to hold on to those REO’s in the hope that someone (anyone) will step in a buy them at a price closest to the price in which the bank is holding the note on.

The SOLUTION in Practice

As an example, a bank lends $500,000 for the purchase of a home. The home falls into foreclosure immediately, with the bank holding the note on the home. This home is now worth $400,000 to a willing buyer, but the bank is un-willing to sell at this price. The bank is unwilling to take an immediate $100,000 loss on this home. Instead, the bank is willing to offer this home to a buyer at $475,000 in the hope of minimizing their loss to a mere $25,000. In the meantime, the buyer at $400,000 disappears and the market price (the price at which a willing buyer and seller would exchange goods) drops to $350,000. Unfortunately, the greed and ignorance of the bank keeps its price at $460,000. The bank is only willing to take $40,000 loss for their erroneous initial investment of $500,000. Keep in mind that this is ONE home, and there is another 5 homes hitting their REO inventory holdings every month. The bank simply asks the government to bail them out of this mess rather than take the loss and clear their balance sheets. Thus, the bank has now shifted the risk of loss due to their own poor investment decision to us, the taxpayers, and still maintains their posture of waiting for prices in the housing market to return to the outlandishly high “bubble” period prices. (e.g. “letting their losses run”).

In my proposal, I require the banks to liquidate any home within 60 days if a home has been sitting as an REO inventory listing for more than 200 days. In the above example, this home would be forced to be sold to a willing buyer at $350,000. The bank would take an immediate loss of $150,000 and the buyer would assume the risk of further price declines. The buyer would most likely seek mortgage financing, resulting in profits to the banking sector. Any new REO listing would be forced to be liquidated within 180 days. This would give the banks enough time to establish a fair and reasonable price without having to resort to a fire sale that could be abused by buyers familiar with the restraints on the bank owned property. The government would not spend a cent to bailout a banks’ poor investment decision. The government would simply require the banks to comply with the liquidation time periods.

Capitalism must be permitted to work in good times as well as bad. Capitalism is the only way to solve a problem rooted in capitalism.  Protectionism will never be able to solve a capitalism problem.  We must force the banks to liquidate their REO holdings and put the houses back into the hands of the market participants.  We must allow the market to assume the risk of fluctuating housing prices. We must force large banking institutions to participate in the market as every other investor must. This means the banks should be permitted to revel in their profits, but must also accept and managing their losses appropriately. We must not allow the banks to strong arm the American public with statements generating fear and paranoia by claiming our money is not safe. We must not be forced to believe that a taxpayer funded bailout is mandatory if the public wants to have access to their savings. The market will bring the housing prices back to parity, thus allowing more American’s to be able to purchase a home.

My solution is sound and is based on proven principles of capitalism. It does not favor any one business or sector over another. My solution does not reward the wrongdoers, the greedy, the bureaucrats or the lobbyists who push for governmental protection. My solution does not punish any market participant any differently than any other market participant. My solution has integrity and treats all participants fairly under the code of market capitalism. Reap your rewards on your solid investment decisions. Accept your losses on your poor investment decisions. Do not ask for government intervention when things are going against you unless you were willing to share your exorbitant profits when your financial situation was favorable to you.

Take Action NOW

Now, I request that every reader of this proposed solution write your Congressman and Senator to pass the along this reasonable solution. Today is Election Day. Change is in the process and we need to encourage our incumbent and newly elected leaders to hold appropriate parties accountable and not penalize innocent taxpayers. We need to bring integrity back to our markets and allow market capitalism to work its magic to cure inefficiencies in the marketplace. Market capitalism cannot exist without Democracy and Democracy cannot exist without market capitalism.

Winston Churchill is quoted as saying “America will always do the right thing - but only after having exhausted all other possibilities”. We have exhausted all other possibilities. Let’s do the right thing by allowing market capitalism to work. Let’s avoid governmental intervention except to promote the economic system we have fought so hard to establish.

–end

T. Gabe Houston is a lawyer in Southern California and the Managing Member of Hegemony Capital Group, an international commodities trading and financial services corporation. He can be reached at Gabe@Hegemony-Capital.com, or visit his website at www.HBLawyers.net.

Because different companies will be more profitable than others, some will be able to afford more or less permits for the emissions. Coherently, the incentives to trade emission permits would be self evident, hence “Cap-and-Trade”. In this system, there would be guaranteed levels of reduction in greenhouse gas emissions, and would reward more environmentally savvy companies financially.
The federal government hopes to auction the emissions permits to firms, and use the profits to tend to other policy objective projects related to climate change. Because this is only a suggested alternative in conjunction to bailing out more companies from financial hardships, it is not certain as to how and where 100% of the profits would be distributed.

In conjunction to Cap-and- Trade , rising C.A.F.E. standards are being debated. C.A.F.E.(Corporate Average Fuel Economy) standards are federal government regulations placed on firms with the intention of improving the average fuel economy of cars and trucks sold in the United States, throughout the peak of the Arab Oil Embargo of 1973. Companies that are affected by this are car makers. Though there is some agreement among voters and policy makers that C.A.F.E. goals are necessary, the trivial question continues to be “are the rising C.A.F.E. standards the right way to reach the goal of improving fuel economy on vehicles?”.