Misdirection Monday: May 17 Oil Spill Update

"I make the weather! All of this moisture coming up out of the Gulf is gonna push off to the east and hit Altoona."

-- Phil Connors (Bill Murray), Groundhog Day

1. Weekly Oil Spill Forecast.

For much of the past month since the April 20 BP oil platform explosion, Northwest Florida has been protected from direct damage by the river of oil in the Gulf of Mexico predominantly by Southeast-to-Northwest winds and water currents. The web site Windmapper, however, is forecasting a change for the first few days of this week.

Monday through Wednesday, it suggests, we are likely to experience a slowly strengthening trend of Southwest- to- Northeast winds. This is the worst kind for our beach.

One of the TV weathermen at local station WEAR-TV is saying, however, that the drift toward the northeast won't be strong enough to push BP oil onto Pensacola Beach. (click photo up and to the left). We'll see how well he imitates Bill Murray's Goundhog Day character in 'making the weather.'

To view Windmapper's daily forecast animation click here. For an hour-by-hour overview of each day of the week, click here.

2. Pipe Smoke Gets In Your Eyes.

Of course, one big news item yesterday was that on the third try, as McClatchy News puts it, the "BP Oil giant succeeded Sunday in connecting a mile-long pipe to help capture what it hoped will be a majority of the oil flowing from a damaged well into the Gulf of Mexico."

But confusion reigns. British Petroleum wasn't saying on Sunday how much oil it really was collecting on board the oil tanker tethered a mile above the wellhead pipe. All we could be sure about is that the pipe insertion didn't completely plug the "massive oil leak." According to Shaila Dewan of the New York Times, BP vice president Kent Wells "could not say how much oil had been captured or what percentage of the oil ... was now flowing into ... the insertion tube."

"Could not?" More likely, would not. The more BP talks, the less they seem to tell us. As a result, reporters can't even agree on the dimensions of the tube that BP inserted:

• WaPo's Steven Mufson and Joel Achenbach report the tube is "a four inch pipe."
• The UK Telegraph (London) yesterday claimed it was a "6-inch tube" that was inserted.
• Ms. Dewan of the New York Times reports it is a "4-inch-wide tube."
• The Los Angeles Times votes that it is a "6-inch suction tube."
• Bloomberg's Business Week says (with metric meretriciousness) that it's a "6 5/8 inch (17 centimeter) tube."
• CBS dodges the question by saying it's "narrow."
• AP voes for 6 inches.
• The Times Picayune casts its ballot for "a 4-inch-wide tube."
• Next door neighbor, NewOrleans.com, dissents; it is "a six inch hose," they say.
  
• The oil industry organ Marine Log bets on "a four-inch diameter."
  
• NPR this morning cautiously remained mum about just how wide they think the tube is.
  

We could go on. Near-endless examples exist. The real lesson to remember is that none of these reporters have a clue what they're writing about. Every one of them is dependent on BP, itself, for the numbers.

Apparently, the ancient adage 'You're entitled to your own opinion but not your own facts' is no longer operative in the Gulf of Mexico. BP drowned it.

3. BP's PR.

There also is a yawning chasm between what BP seems to be saying and what, in fact, it is saying. Only lawyers and those journalists accustomed to dealing with slippery oil corporations have noticed that BP is playing a very "cagey" game -- to borrow the admiring word from the Jakarta Globe, a newspaper published in a country that has a long and sad history of being shamelessly exploited by underwater oil drillers.

For just one example, an early report Sunday afternoon by Shaila Dewan of the New York Times at 1:58 pm CDT clashed with another by Jeffrey Collins and Jason Dearen of the Associated Press which was originally published within minutes that same afternoon. Dewan reported that BP would not disclose "how much oil and gas were taken aboard the... drill ship... as it is siphoned off" by the 4- (or is it 6-?) inch pipe. Contrariwise, Collins and Dearen claimed that "BP said a mile-long tube was siphoning most of the crude from a blown well to a tanker... ." [emphasis added]

At mid-day Monday, BP owned up to the reality. As CBS News, France's wire service, and other sources are now reporting, only "about 20 percent of the oil gushing into the Gulf of Mexico is being swallowed up by its insertion tube system." That "20 percent," moreover, is based on now-discredited estimates that the leak consists of 5,000 barrels a day.

In fact, yesterday's insertion of the "mile-long pipe" enables BP to capture only 1,000 barrels a day. This means the "success" yesterday is far less consequential than either the Times or the Associated Press were saying yesterday.

As multiple news outlets are reporting today, the actual leak rate is now believed by scientists to "be between 25,000 and 80,000 barrels per day." Accordingly, a thousand barrels a day means the 4- or 6-inch pipe is capturing as little as one-and-one-quarter percent of the oil gushing into the Gulf every day.

Are we better off than we were on Friday? Reality has not appreciably changed. But insofar as public knowledge is concerned, in the space of just three days we've gone from 5,000 barrels of oil a day freely pouring into the Gulf to as much as 80,000 barrels a day, minus a measly one thousand barrels captured by the 4-inch -- or is it 6-inch? -- pipe plug.

4. Oil Lakes Beneath the Sea.

There are other, even more momentous issues, where it's useful to bear in mind all the misdirection going on. For example, independent researchers, like oceanography professor Vernon Asper of Southern Mississippi University, have found huge pools of oil "at substantial depths down to at least 1,300 meters, which is very close to the depth of the well."

We’re thinking that this oil is probably some fraction of the oil that’s not reaching the surface but instead is sort of spreading out and then the currents are taking it wherever the currents are going.

The pools of underwater oil are said to be just "too big" for the usual bottom-dwelling organisms that metabolize oil to "gobble" them up. (You can read the interview with Prof. Asper last Friday here; or, listen to the podcast here.)

As Justin Gillis of the New York Times reports:

Scientists are finding enormous oil plumes in the deep waters of the Gulf of Mexico, including one as large as 10 miles long, 3 miles wide and 300 feet thick in spots.
* * *
“There’s a shocking amount of oil in the deep water, relative to what you see in the surface water,” said Samantha Joye, a researcher at the University of Georgia who is involved in one of the first scientific missions to gather details about what is happening in the gulf. “There’s a tremendous amount of oil in multiple layers, three or four or five layers deep in the water column.”

The plumes are depleting the oxygen dissolved in the gulf, worrying scientists, who fear that the oxygen level could eventually fall so low as to kill off much of the sea life near the plumes.

5. Damaging Dispersants.

This is especially worrisome given BP's practice of continuing to release hundreds of tons upon hundreds of tons of "dispersants" a mile below the surface near the wellhead. As USM professor Asper told The World radio program Friday, "we don’t know what affect the dispersants might have." And, as usual, BP isn't talking.

For more on the threat posed by excessive use of dispersants, check out The Truth about Gulf Oil Spill.

6. Swallowing BP's Word for It.

Journalists are one thing. Washington politicians should be even more embarrassed by their unquestioning acceptance of whatever BP says. As Sam Stein suggests over at the Huffington Post, foremost among them is our next-door neighbor, Alabama senator Jeff Sessions (R-AL):

Late this past week, Republicans in the Senate effectively blocked legislation that would have raised the cap on the amount of money oil companies like BP would have to pay for economic damages caused by oil spills.
* * *
Sen. Jeff Sessions (R-Ala.) suggested on Sunday that raising the cap was unnecessary because BP had given him it's word that it would cover the costs of the spill in the Gulf.

Not far behind is the Obama administration. It took them until last Friday to wake up to the legal reality that BP's oral word is meaningless when it comes to paying all "legitimate claims" for damages. As veteran reporter James Ridgeway writes, the company's reputation is "coated in sludge."

So far as we can tell, the oil company's only response to this hour has been to have their PR flack-catchers repeat the same oral assurances:

"What they are requesting in the letter is absolutely consistent with all our public statements on the matter," BP spokesman David Nicholas said.

But will they love us in the morning? We'll wait for an answer in writing, signed, and notarized by BP's chief executive officer and board chairman Carl-Henric Svanberg. Then, BP can kiss us.

Oral assurances that BP will fully pay all "legitimate" damages caused by this disaster are of no use whatsoever when the graven law imposes a $75 million limit on its liability.

Dept. of Amplification
05-17 pm
Robert Reich, former Secretary of Labor, has additional thoughts along the same lines ["BP Stands for Bad Petroleum"]:

Saturday the White House warned BP that it expects the oil giant to pay all damages associated with the disastrous oil leak into the Gulf of Mexico, even if the costs exceed the $75 million liability cap under federal law. BP responded Sunday saying its public statements are “absolutely consistent” with the Administration’s request.

When you hear dueling public statements like these, watch your wallets. You can safely assume BP’s lawyers are already at work to ensure that the firm pays not a cent more than $75 million — not to taxpayers bearing cleanup costs, not to consumers whose gas bills will rise, not to businesses along the coasts that will lose a fortune. And BP won’t pay more unless or until there’s a law requiring it to.

BP * * * [is] the poster child for PR masquerading as CSR.

There's a good deal more worth reading ...

Trustees Fire Richburg

From the Tampa Bay newspaper blog, The Buzz: "The trustees of Northwest Florida State College just voted to fire president Bob Richburg, the man who hired Rep. Ray Sansom and was indicted along with him earlier this month. The vote was 4 to 3." More here.

Richburg Rumpus

Northwest Florida College's president, Bob Richburg, is facing trial on state felony charges. Now, he has more to worry about.

A self-described "muckraker" with "no ax to grind" -- retired Air Force officer Alan Vafides of Fort Walton Beach-- has filed a state ethics complaint against Richburg for failing to disclose his close business ties with former state senator Charlie Clary. Ditto that last for college board member Jody Henderson.

Meanwhile, governor Charlie Crist says he'll be "asking" the college to return the $6 million previously steered toward the college to build an airport hangar for his developer buddy, Jay Odom.

The trustees can't be happy to have their names associated with this spreading scandal. But, can they summon the courage at today's "special session" to fire Richburg? If not, we expect to see soon a number of them resigning in order to "spend more time with the family."

Sansom Missing in Action

Did the judge impound Ray Sansom's Florida passport when he released the indicted legislator on bail? The Destin Republican is missing in action in Tallahassee, precisely as Florida lawmakers get down to serious horse trading in the closing days of the legislative session.

Can Northwest Florida College Trustees be Trusted?

One aspect of the Ray Sansom/Bob Richburg scandal that hasn't been getting enough scrutiny is what, if any, role the members of the college's Board of Trustees played. Among other things, college boards of trustees in Florida have responsibility for establishing and enforcing recruiting and hiring policies, advertising their own public trustee meetings, and evaluating "the performance of the community college presidents... ."

It sure looks like, collectively, the "Northwest Florida College" Board of Trustees has a lot to answer for. Among other things:

• They turned a blind eye, to be charitable about it, toward the obviously fixed hiring of Destin politician Ray Sansom as a "part-time" college vice-president at a salary of $110,000 per year, when he didn't even meet the minimally-advertised job qualifications.
• In 2007, the trustees accepted college president Bob Richburg's "resignation" so he could collect over half a million dollars in accumulated state pension benefits, and then the board re-hired him in the same job with a three percent raise just one month later -- after what no one could call a bona fide nationwide advertising campaign to fill the post with the best qualified candidate. Even conservative Republicans were outraged at that one.
• The Northwest Florida College Trustees acquiesced a year ago, when Richburg set up one a March board meeting in a private "members only" Tallahassee club 150 miles away from the campus, then they defended the action afterward when Florida's attorney general called the meeting legally questionable and likely a violation of the Sunshine Law.
  
• No minutes of that "legislative update" meeting were taken by or for the trustees -- yet ten months later they approved supposed "minutes" of what took place, just as prosecuting attorneys were about to empanel a grand jury.

So, who are these "Northwest Florida College" Trustees? To all appearances, the board is drawn 100% from the local business community. By contrast, a new nationwide survey of state and local community colleges -- and that's what "Northwest Florida College" really is, hyped-up name to the contrary notwithstanding -- finds that, nationwide, only 32% of trustees on boards "were from the business sector."

None of the present members of the Okaloosa-Walton county college appears to be renown in higher education circles for, or to have demonstrable expertise in, academic administration, management, college teaching, or research. Now, we could be wrong. Maybe the otherwise prosaic-looking composition of the Northwest Florida College board of trustees masks a John Dewey clone, a Warren Buffet heir, or a fund-raising genius.

To find out more about the trustees, however, could it be symptomatic of some deeper malady that the college's web site directs us to call the "Marketing Department?"

All of the trustees, no doubt, volunteer their time because they want to serve the college and the local community. For that, they doubtless deserve the standard round of politely appreciative applause.

But community college trustees have something else, too: fiduciary and legal obligations, as described in State Board of Education rules. They are required to establish college policies and hold executives accountable for following them.

When two of the top administrators "hired" by the college trustees are indicted by a grand jury for college-connected activities, and the legality of the board's own conduct is called into question by the state's attorney general, it's well past time for someone on the state Board of Education to be asking, "Who are these trustees and what on earth have they been doing?"

Elizabeth S. Campbell (business owner)
McCaskill & Co.
P.O. Box 369
Destin, FL 32540

Joseph W. Henderson (CPA)
O'Sullivan Creel
P.O. Box 1600
Fort Walton Beach FL 32549

Brian S. Pennington
Tybrin Corporation
1030 Titan Court
Fort Walton Beach FL 32547

Dale E. Rice, Jr. (CEO/President)
First National Bank of Crestview
1301 Industrial Drive
Crestview FL 32539

Sandy Sims
Gulf Power Company
1 Energy Place
Pensacola FL 32520

Vercell Vance, CEO
(Business Owner)
Alpha Data Corporation
1326 Lewis Turner Blvd.
Fort Walton Beach FL 32547

Esteena K. (Teena) Wells (Self Employed)
92 Hillcrest Way
DeFuniak Springs FL 32433

Wesley Wilkerson (Business Owner)
54 Seashore Circle
Santa Rosa Beach FL 32549

Northwest Florida Leaders Indicted

Northwest Florida kingpins Ray Sansom (R-Destin) and Okaloosa-Walton County college president Bob Richburg were indicted Friday on felony "public corruption" charges. Richburg also faces a second charge of perjury.

Sansom, R-Destin, was booked into the Leon County Jail on Friday afternoon and released on his own recognizance. If convicted, he faces up to five years in prison on the felony charge.
* * *
State Attorney Willie Meggs said Richburg unconvincingly told the grand jurors that building an aircraft hangar and emergency-management complex 15 miles from the Niceville campus was a "multiuse educational facility."
* * *
Meggs said Sansom's charge, a third-degree felony, reflects the then-House budget chief's creation of a false and fraudulent budget item that described the hangar project as a college building.

The full 10-page grand jury indictment can be read here. From the narrative "presentment" that follows the actual indictment, it's clear that the grand jury more or less considered Northwest Florida developer Jay Odom an unindicted co-conspirator. As Gannett Publishing Co.'s Tallahassee reporter puts it --

Odom, who contributed more than $1 million to the state GOP and Sansom's political causes, was not accused of any legal violation, but the grand jury said back-scratching among corporate honchos and politicians is a symptom of a deeply rooted malady.

At the root of this back-scratch was Odom's persistent efforts to find "other people's money" to finance a $6 million airplane hangar for one of his companies, Destin Jet, which he promotes as a state-of-the-art luxury private jet service. When Okaloosa County emergency managemnt personnel expressed no interest in misusing public money for Odom's company, the grand jury's narrative suggests, Odom used college president Richburg to be his cat's paw, in order to claw the $6 million out of Florida's state education appropriation:

During 2OO7 and 2008 airport officials learned about the appropriation to NWFSC [Northwest Florida State college] and the requirement by the Legislature that the college facility would be built at the Destin Airport. The college was to use a development order previously prepared by Destin Jet. The Destin Airport is located fifteen miles away from the NWFSC campus in Niceville. * * * During this meeting the NWFSC officials discussed how the building would be used. The college would have classroom space and the college could sub-lease the storage area to Destin Jet. The building essentially was the same design as Destin Jet's 2004 design, and is still an aircraft hanger. The second floor drawing now includes classrooms as opposed to office space and the first floor is now called a staging area.

The kicker is, "NWFSC does not have an aviation component in its curriculum" and "the vice-president of NWFSC responsible for construction of structures, Dr. Yancy, was not aware of the hanger project until he leamed that The Legislature had appropriated funds for it."

Your Grand Jurors have determined that the funding for this hanger can be attributed directly and solely to Speaker Designate Ray Sansom. No member of The Legislature ever saw this appropriation until it was inserted into the appropriation bill during conference between the Appropriation Chair Ray Sansom, and his senate counterpart senator, Lisa C arlton. The hanger project for a community college was the sole work of Ray Sansom, Jay Odom and Bob Richburg.

Jaded Northwest Floridians, by now, fully expect to be ripped off by developers like Jay Odom. Cronyism, corruption, and cupidity run so deep and wide among politicians at every level in the Florida panhandle that the only surprise is there's someone left still honest and courageous enough to try catching them.

But a corrupt college president -- and one who allegedly perjured himself, too? That still surprises.

It probably shouldn't. The reality of higher education is that some time ago it ceased to resemble the idyllic vision of berobed scholars, books in arm, thoughtfully wandering the tree-studded groves of academe.

The "Commercialization of Higher Education," as Derek Bok explains in a book by the same title, inevitably has compromised values "that are essential to the continued confidence and loyalty of faculty, students, alumni, and even the general public." When college presidents, in the scramble to acquire more and more money, climb into bed with developers and politicians, it's to be expected many will wake up indicted.

Dinner Invitation

When in Pace, Florida, eat at the Phillips home. And pick up home decorating tips at the same time!

Deeply Religious Thought

Pensacola News Journal, Sunday, August 3, 2008:

The Phillips family has many mounted turtle heads in their home, but they are not sure what they're going to do with Goliath.

"I'm not going to kill this one yet," Glen said.

If there is a god who toys around with reincarnation, let's hope she brings this young fellow back some day as turtle food.

Oily Pandering to the Voters

UPDATE BELOW

In an interview yesterday with the St. Petersburg Times Barack Obama "offered encouraging words Friday for a bipartisan energy plan that would permit oil drilling within 50 miles of Florida's west coast."

Obama commended the self-styled "Gang of 10" — five Democrats, five Republicans — for their cooperation and broad plan.

Obama didn't specifically endorse the bill, but his willingness to consider more oil drilling represents a significant change in position. And it dramatically alters prospects for the bill.

"My attitude is that we can find some sort of compromise," Obama told the Times shortly after talking with voters at Gibbs High School. "If it is part of an overarching package, then I am not going to be rigid in preventing an energy package that goes forward that is really thoughtful and is going to really solve the problem."

Huffington Post says these "encouraging words" represent a shift "from his previous opposition to expanded offshore drilling." That's far too strong.

Obama is a thoughtful man who ordinarily chooses his words carefully. Too carefully, some might say. A "willingness to consider" isn't the same thing as outright endorsement. But in this era of the Gotcha Sound Bite, it will be received by a grateful media rather too readily like the fine distinctions Bill Clinton drew over the definition of "sex."

What is not being reported as widely are the deep reservations Obama articulated in the same interview about the drilling 'compromise':

"Like all compromises, it also includes steps that I haven't always supported," Obama conceded. "I remain skeptical that new offshore drilling will bring down gas prices in the short-term or significantly reduce our oil dependence in the long-term, though I do welcome the establishment of a process that will allow us to make future drilling decisions based on science and fact."

In context, Obama's full remarks make it clear that he knows drilling off the coast isn't smart economics, energy, or environmental policy. As the St. Pete Times also reports:

In Friday's interview, Obama reiterated his belief that "we are not going to drill our way out of this problem. ... We have 3 percent of the world's oil reserves; we use 25 percent of the world's oil."

The only immediate effect of the latest oil drilling 'compromise' would be to appease Americans whom polls show are -- as National Public Radio is reporting this morning -- frustrated, frightened, and angry over escalating gas prices.

Some will conclude that Obama is just playing politics. But is it "good" politics?

At a time when Barack Obama is still trying to "define" himself, the "sound bite" heard 'round Teevee Land will discourage many who are hoping for someone smarter, more honest, and more thoughtful than the current occupant of the White House, or our own worthless congressman in Northwest Florida, or for that matter John McCain -- who never met a drilling rig he didn't think would look great on Pensacola Beach.

And what's with picking Florida as the venue for Obama to announce he's "open" to considering drilling off the eastern Gulf coast? What's next for the candidate of "change"? Will he diss ethanol in Des Moines? Trash mass transit in Portland? Announce he's "willing to consider" prohibition of wine drinking in Napa Valley?

Whether he was being too clever by half or not, Obama did real damage yesterday in one respect no one is talking about. He not only let the soundbite slip out that enables the media to further tarnish his image as a candidate for change, but he undercut fellow Democratic Senator Bill Nelson within his own senatorial caucus.

Nelson, to his credit, has been a courageous realist when it comes to drilling proposals. As he has pointed out repeatedly, and again told the St. Petersburg Times on Friday:

Fifty miles off the coast would cut the heart and the lungs out of the United States military, because the largest testing and training area for the Department of Defense in the world is the Gulf of Mexico off of Florida. ... That's something he needs to know.

A U.S. Energy Department study has found it will take years before gas and oil from the eastern gulf would come online, and the impact on prices would likely be negligible.

After Obama's remarks in the interview, Nelson now has to save face by falsely claiming that Obama needs to be educated "on the repercussions of drilling 50 miles off the coast." That, too, is nonsense, as the full interview with the St. Pete paper shows.

Obviously, Obama knows what's what. Nelson knows that Obama knows. Yet, both of them are dissembling!

Might it have been smarter politics for Obama to come to Florida, reaffirm his principled opposition to drilling, and stand strong with fellow senator Bill Nelson? That kind of honesty would give us real Hope that Change is possible.

UPDATE
8-02 pm

Saturday, Obama is rejecting media suggestions that he has changed his position against drilling off the Florida coast. From ABC-TV, where the headline writers don't read the copy:

Today, at a press availability in Cape Canaveral, Fla., Obama said that his comments weren’t a shift.

“This wasn’t really a new position. What I’m saying is that we can’t drill our way out of the problem,” he told reporters. “And if we can come up with a genuine bi-partisan compromise in which I have to accept some things I don’t like, or the Democrats have to accept some things that they don’t like, in exchange for actually moving us in the direction of energy independence, then that is something I am open to.”

Zoo Endangered Species?

Following up on yesterday's story, Louis Cooper reports that Northwest Florida Zoo board members held an emergency telephone meeting yesterday. It looks like the Zoo cannot meet its July payroll. Quick closure looks imminent unless attendance unexpectedly shoots up or someone rides to the rescue.

In the meantime, a talented local with the YouTube handle of Gleo57 recently posted this video of what may be, now, our most endangered species -- the Zoo itself.

The One Sentence Solution for the Housing Crisis

The Housing Crisis

Every day new foreclosure suits are being filed in Northwest Florida -- not to mention harder-hit areas like Tampa Bay and, for that matter, across the nation. Anyone who subscribes to a courthouse filings service or foreclosure-watch web site can attest to the trend.

The daily mortality toll already is approaching bloodbath proportions. According to investment banker Peter Siris, "In 1982, foreclosures represented 3.6% of all homes for sale. Now they represent a staggering 38%."

At the moment it looks like "'at least' 1.4 million homeowners will lose their properties to foreclosure in 2008, according to the U.S. Conference of Mayors. And that's the optimistic view.

The Phony Solution

But George Bush has a plan called "Hope Now", right? It might save as many as a hundred thousand or so (less than 10%) of those unfortunates, right? Not.

Via Digby, we were directed earlier this week to an article by San Mateo, Cal. attorney Sean Orlender in the San Francisco Chronicle:

It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.

But unfortunately, the "freeze" is just another fraud -- and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value -- right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.

Economics professor Paul Krugman made much the same point a few days ago when he wrote that the Bush administration's plan --

is entirely focused on reducing investor losses. Any minor relief it might provide to troubled borrowers is clearly incidental. And it is does nothing for the victims of predatory lending.

Disaggregating Mortgages to Create New Markets

What led to this crisis in the first place was the effort by investment bankers to create a brand new trading market for what is called "mortgage-backed derivate securities." In a nutshell, investment banks began to buy up multiple mortgages from disparate lending banks and locales. Then, they cross-cut these mortgages, as you might cut a steak across the grain, to subdivide them into smaller bits of commercial paper consisting of, say, the sweetest meat, some tougher slices, a little gristle and a lot of unwanted fat.

But we're talking mortgages here, not meat. In reality, when you disaggregate a mortgage what you are doing is separating some of the rights in a mortgage contract from others -- say, for example, the right to collect all interest payments, or all principle payments, or some other "right" that derives from an original mortgage. When you take those separate bits and re-aggregate, you have new packages of "rights," each a different bundle consisting of "derivative" rights ready to be sold to others.

Ultimately, as we know now, the investment banks got carried away by their own greed. They diced and sliced mortgage-based derivatives into subordinate rights, "rated" the new bundle of rights for investment purposes, then re-diced and re-sliced those derivatives again into yet another kind of commercial paper... and sometimes again... and even again. Each time, the newly created "mortgage-based derivatives" were sold and re-sold and re-re-sold until even the bankers couldn't be sure who owned what, which of the investors (if any) had the right to negotiate with the borrowers, and even who had the right to foreclose if homeowners stopped making payments. Now, many of those bundled securities are nearly worthless.

Hair of the Dog

So, the Bush administration's "Hope Now" program is nothing more than a mirage for most homeowners. And, the investment banks have made such a cocked-up mess of things that no one can be sure just what, if anything, their little share of the once-whole steak is worth, if anything.

However, there is something Congress could do that would bring immediate relief to millions of distressed homeowners and at the same time renew hope that the most troubled mortgages retain value. We call it a "hair of the dog that bit you" solution.

Like the famous nostrum for curing a hangover, it mimics to a degree the original cause of distress. Just as the root of today's crisis lies in the efforts of investment bankers to create a whole new trading market into which they could sell bundled mortgage-based derivatives , so now the solution is to create another housing market.

Check that. Not "create," exactly, and not a "new" market. More accurately, we mean re-create. And it wouldn't be a "new" market, but an old and honorable one that worked exceedingly well until Congress, itself, killed it a few decades ago at the behest of the banking industry.

Creating a 'New' Contract Market
What we are thinking of is the private contract housing market. Time was, in many states, that home owners with an outstanding mortgage could freely sell to willing and able buyers via a private contract. In at least 14 states, local law prohibited the courts from enforcing any "due on sale" clause in a mortgage on the grounds that it interfered with freedom of contract rights and was in any event against public policy.

In those states that either barred "due on sale clauses" or refused to enforce them, instead of requiring every buyer of a mortgaged home to take out a new mortgage loan, the seller and buyer were free (if they wished) to negotiate their own deal. Sometimes, those deals involved the buyer making agreed-upon payments to the seller while the seller continued to make mortgage payments to the bank. Other times, the parties might agree that the buyer would formally "assume" the mortgage and make the monthly payments himself.

For most of our nation's history, private contracts for home sales with freely-assignable mortgages sustained a healthy and vigorous housing market in many states. But then something happened to kill that entire market insofar as homes with outstanding mortgages are concerned. As Robin Paul from California explains on his web site

One trend in the mortgage industry has been the virtual disappearance of assumable mortgages. This is unfortunate for homebuyers, since an assumable mortgage allows them to retain a below-market interest rate and avoid many closing costs, such as a credit check and appraisal. Except for certain FHA and VA loans, almost all mortgages now contain a “due-on-sale” clause which require that the mortgage be paid if there is a change in ownership.

Typical “due-on-sale” language states that, “the Lender may, at its option, declare immediately due and payable all sums secured by the Mortgage upon the sale or transfer, without the Lender’s prior written consent, of all or any part of the Real Property, or any interest in the Real Property.” A reading of the language shows that the term, “due-on-sale” is misleading. In fact, the mortgage may be called in if there is any transfer of any interest in the real estate, and not just a sale of the property.

Back to the Future: Reviving an Old Law as the Solution

The "disappearance" of the assumable mortgage was the direct result of a one-sided piece of legislation engineered in 1982 by the Reagan administration and a cowed (or bought and paid for Congress.) A banking industry-friendly federal law was enacted that effectively killed the "freedom of private contract" rights of mortgagor-homeowners nationwide.

12 U.S. C. 1701j-3 states in pertinent part:

Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may, subject to subsection (c) of this section, enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan.

What Congress hath taken away it can grant again. It only remains for some courageous congressman, senator, or presidential candidate to propose a one-sentence solution.

Due on sale clauses are contracts of "adhesion," as the lawyers would say. They are forced on mortgage debtors, not genuinely bargained for. Whatever should it matter to a lending bank (or holders of the mortgage-based derivatives) who makes the mortgage payments as long as they are made? Besides, as Atrios has explained, "The people who actually own the loans aren't in the mortgage business anymore than stockholders in Apple are in the IPod business."

As a matter of economics, due-on-sale clauses also unreasonably restrict the housing market available to sellers. Now we know, too, that they only exacerbate a credit crunch like those we're seeing now.

In the new era of "mortgage-based derivate investments" when the lender you owe is not the lender you know, due-on-sale clauses have outlived their usefulness, if they ever had any. They should be declared unenforceable as a matter of national policy.

AMPLIFICATION DEPT.
12/14 PM

Email responses from some readers point out that making due on sale clauses unenforceable (once again) would not completely solve the credit crisis brought on by imprudent mortgage lending or borrowing practices. Nor does it directly address the problem some homeowners are facing if they've already paid the mortgage but want to sell in the present market.

True enough, as far as that goes. But eliminating due on sale clauses would significantly expand the market of potential home buyers. That's the point. More buyers means greater demand. To that extent, every homeowner benefits whether he has a mortgage or not.

Another reader points out that "due on sale" reform does nothing for foreign or domestic inventors -- like the Florida Local Government Surplus Fund or the city of Narvik, Norway -- who are already stuck with bad commercial paper sliced-and-diced into existence by careless investment banks.

That's only partly true. As and when demand for homes rises, the portfolios of investor institutions like Florida's LGS Fund and Narvik should improve. In any event, it should be plain enough by now that the Bush administration is not principally interested in benefiting homeowners. It's the investment banks they want to protect from the consequences of palming off bad paper on unsuspecting customers.

Finally, another reader grumbles that the real winners of due on sale reform would be wealthy speculators seeking to invest in home purchases on the cheap. They wouldn't necessarily have to go through a bank; the seller becomes their 'lender.'

Our answer to that is those speculators are out there now. Like the poor, we shall always have them with us. Indeed, a good many seem to be gathering at the Canadian border, strongly-appreciated loonies in hand, just waiting for the U.S. housing market to bottom out.

They'll be buying, sooner or later. Wouldn't it be some relief to distressed homeowners if it was sooner, rather than later?