Most investors know that there's a difference between Democratic Party leadership and Republican Party leadership, as it relates to U.S. fiscal and economic policy.

However, although more economically-cohesive than the Democratic Party, the Republican Party is not monolithic, and there's perhaps no better example of these often nuanced differences in policy than the positions on home mortgage assistance policy held by U.S. Treasury Secretary Henry Paulson, and FDIC Chairman Sheila Bair.

Paulson has been slow on payment relief

Although he has shown support for mortgage refinance programs aimed at achieving lower payments - - 'payment relief' in Washingtonspeak - - Paulson has steered clear of policies that would mandate that banks unilaterally lower principals, or interest rates, preferring to stick with a voluntary approach, whereby banks basically negotiate with borrowers on a case-by-case basis.

That traditional Republican response, economist David H. Wang said, "has prevented mortgage refinancings from occurring for those who don't truly need them," but it also has increased the at-risk mortgage pool, delaying the housing sector's recovery.

A solution to the above, in Wang's view? Adopt the FDIC plan backed by Bair, whereby the Treasury would use its funds to speed refinancings for at-risk homeowners in owner-occupied homes. Wang agreed with Bair that the FDIC plan could prevent 1.5 million foreclosures by the end of 2009.

"It could prevent even more, perhaps as many as 1.8-2 million foreclosures, and until the U.S. ends these waves of foreclosures, very little good news will occur from a GDP standpoint, which is why Bair's plan should be enacted," Wang said. "I also think President-elect Obama should appoint her to a Special Advisor post in the Obama Administration, solving the home foreclosure problem is that critical to the nation's economic health."

Talking about the seedy side of subprime lending at the height of the bubble seems redundant -- like talking about Jeffrey Dahmer's dark side. But a piece in BusinessWeek looks at an especially sleazy side of the industry: "Dozens of former brokers and wholesalers say the trading of sexual favors was so common that it came to be expected."

Wholesalers reportedly offered loan underwriters sexual favors in exchange for approving questionable mortgage applications.

The scenes described in the piece sounds like something straight out of the movie Boiler Room: brokers sitting in the middle of an office shredding some documents and altering others in plain view of their supervisors and harassment and termination for anyone who protested the illegality.

While there were scattered lawsuits and reports of impropriety while all this was happening, no one really paid attention to it until after the music had stopped. A huge portion of the homeowners who are currently facing foreclosure participated in some form of mortgage fraud that was condoned by industry insiders.

In October of 2004, Chris Swecker, former FBI Assistant Director of the Criminal Investigation Division, told House Financial Services Subcommittee on Housing and Community Opportunity that "The potential impact of mortgage fraud on financial institutions and the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market."

That's exactly what happened, but too much money was being made, and too many lap dances being given, for anyone to care.

Washington Post Business Columnist Steven Pearlstein does not 'hold it all in,' as they say, regarding who he thinks is most to blame for the financial crisis.

Pearlstein cites the ineptitude of Wall Street and the nation's financial regulators. The crisis would have occurred whether Lehman Brothers was saved or not, because bad debt had overwhelmed the global financial system. A government intervention was inevitable, essential, and an act of leadership, in Pearlstein's view.

Conversely, Wall Street's top executives have shown little leadership, if any, he said. Their silence and invisibility throughout the crisis "attests to their moral and political bankruptcy," Pearlstein said, a perfect match for the financial bankruptcy they caused for investors, creditors, and customers.

Further, Pearlstein is particularly angered by Wall Street's top executives unwillingness to commit to a plan to enable borrowers to refinance mortgages into government guaranteed mortgages set at 85% of current market value of the property, and at the executives' utter lack of comment before the cameras, particularly regarding credit lines to businesses.

Political & Economic Analysis: Columnist Pearlstein clearly lays the blame for the financial crisis at the feet of Wall Street's top officials. Still, the mortgage process -- and the failure of a substantial portion of the subprime/Alt-A mortgage market -- involved many players: bank executives/lenders, mortgage brokers, appraisers, securitization specialists, ratings agencies, and borrowers.

The housing market is not done "adjusting." The Case-Shiller index of house prices fell at a record rate in July 2008. Its 20-city index fell 16.3% from the previous year, while the 10-city index declined an even greater 17.5% -- more than it ever has in its 21-year history. Las Vegas had the worst decline at 30%.

The big picture is that the ratio of the median house price to median income has risen from 2.8 to 4 in the last several years. That's because the mortgage-backed security (MBS) industrial complex needed more raw material for its factory. So it lent money to people who could not pay it back -- this is the $1.3 trillion subprime market. Now that it's becoming clear that more and more people will not be paying back those mortgages, the credit wind is coming out of the sails of the housing market.

The decline in housing prices could be good news if it leads to a change in American culture. We need to recognize that the celebrity industrial complex has gone hand-in-hand with the consumer lending business to create a need to live beyond our means and then fill that need with reckless borrowing. Would it be so bad for people to actually be able to afford what they own or rent rather than to feel like they are one missed payment away from losing it all?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

The San Francisco Chronicle reports that not only is Wells Fargo & Co. (NYSE: WFC) surviving the chaos on Wall Street, but it just may be thriving. About the only reason that Wells Fargo has been in the news recently is as a potential buyer of Washington Mutual (NYSE: WM). In fact, as markets tumbled early in the week, Wells Fargo shares reached a new 52-week high of $44.69.

Industry observers say that Wells Fargo's stability is a consequence of its limited exposure to failing mortgages, particularly of the subprime variety. It hasn't escaped unscathed, however. It said it would take charges in the third quarter related to investments in Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and Lehman Brothers, but much less than those taken by rivals Wachovia (NYSE: WB) and Washington Mutual.

Wells Fargo has been selectively acquiring assets, mostly in the western U.S., during the economic woes, and is expected to continue to do so. Chairman and former CEO, Richard Kovacevich, is rumored to me looking for one more deal before he retires later this year, according to Reuters. But both Wells Fargo and Washington Mutual have declined to comment on a possible deal. "There's going to be a lot of mergers and acquisitions for either good reasons or because people don't have choices," said Kovacevich, pointing out that Wells Fargo is not the only lender looking to buy.

Wells Fargo shares closed Friday at $39.80 and are up 31.8% year to date. Analysts surveyed by First Call recommend holding Wells Fargo.

Thanks to a downgrade warning from Moody's, bond insurers Ambac Financial Group (NYSE: ABK) and MBIA Inc. (NYSE: MBI) are sitting out today's massive rally in financial stocks. Late Thursday, Moody's announced that it may downgrade the duo's ratings by more than one notch due to rising losses from subprime mortgage debt. So far today, the news has prompted a 7% drop in MBIA shares, and a slump of nearly 8% for Ambac.

In a statement, Moody's said, "Because both Ambac and MBIA are meaningfully exposed to the risk of U.S. subprime mortgages and other residential mortgage products, the revised assumptions are expected to have a significant impact on the firms' capital positions and multi-notch downgrades are possible." Specifically, the "A2" insurance financial strength rating of MBIA's insurance unit is under review, as is the "Aa3" insurance financial strength rating for Ambac.

Neither bond insurer seems particularly pleased by Moody's decision. Jay Brown, chairman and CEO of MBIA, said that the review reflects "inherent flaws" in the ratings company's logic, and added that his company has a capital cushion of more than $3 billion. Ambac's chairman and chief executive, Michael Callen, noted his "surprise and disappointment" at the news, and added that "Moody's ratings actions continue to cause confusion, uncertainty and the risk of material economic damange if their assumptions ultimately prove to be too onerous."

Despite today's plunge, MBI and ABK remain poised atop support from their respective 10-week moving averages. Both bond insurers have endured massive price plunges amid subprime-related fallout, but they've recently rebounded. Ambac now boasts a 60-day relative-strength reading of 381% versus the S&P 500 Index, while MBIA's is 312%.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

Homeowners struggling to pay their bills must find the federal government's bailout of troubled Wall Street firms confusing.

After all, government officials have repeatedly said they would not help victims of the subprime mortgage crisis, reasoning that they should not get rewarded for making bad decisions.

It's Economics 101 that people who take bad risks will continue to do so if there are no consequences to their actions. But the $85 billion rescue of American International Group Inc. (NYSE: AIG), the bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), the possible rescue of Washington Mutual Inc. (NYSE: WM) and the shotgun wedding of Merrill Lynch & Co. (NYSE: MER) to Bank of America (NYSE: BAC) brings all of these cherished notions of free markets into question.

Why is the government helping companies who sold mortgages to people who they knew couldn't afford them and repackaged the loans into securities that were unloaded on unsuspecting investors -- but doing little for individual homeowners?

It's been over a year since I last posted on liar loans -- these are mortgages which the borrower obtains despite offering no documentation on their income, employment or assets. These liar loans were also known as Ninja loans -- which is short for no income, no job, and no assets. The Associated Press reports that such liar loans will add $100 billion to the losses our economy is already suffering thanks to $400 billion worth of losses from subprime mortgages.

The problem we face as an economy is that it's hard to see where the liar loans end and the collateralized debt obligations (CDOs) and other asset-backed securities begin. In a sense, they are all liar loans. In the case of the mortgages, borrowers created paperwork that was inconsistent with their actual financial condition so they could get the money. In the case of CDOs, the issuing investment bank bought a AAA rating from a rating agency which created the illusion that the security was safe. Conceptually, there is little difference -- both depended on essentially forged paperwork to make the loan go through.

Why did banks issue liar loans? They were afraid to lose market share. But that doesn't make it right. As my mother used to say to me, if the other kids jumped off the Empire State Building, would you do it too? AP brings this to life in an interview with David Zugheri, co-founder of Texas-based lender First Houston Mortgage who said, "Everybody drank the Kool-Aid. They knew if they didn't give the borrower the loan they wanted, the borrower could go down the street and get that loan somewhere else.''

Bloomberg News reports that banks' subprime write-downs have hit $500 billion. The last time I checked, that figure was $400 billion. Bloomberg reports that New York University economist Nouriel Roubini forecasts such losses will ultimately total $2 trillion. I wonder if he would revise his estimate upwards.

Recently banks have been taking write-downs for their Auction Rate Securities (ARS). Bloomberg reports about $1.9 billion has been set aside so far to cover ARS losses. It notes that UBS AG (NYSE: UBS) set aside $900 million to cover potential losses and Citigroup, Inc. (NYSE: C) and Wachovia (NYSE: WB) each estimate that their ARS buybacks will cost $500 million.

Write-downs have been going hand in hand with capital raising. But banks and brokers have not been able to raise enough capital to offset the losses. Bloomberg calculates that they've raised "$353 billion of capital to cope with the write-downs. The gap between the losses and capital infusions, which stands at $148 billion, has regularly narrowed to about $80 billion as capital raising follows write-down announcements."

Can banks and brokerages raise another $1.7 trillion to keep up with the write-downs that Roubini forecasts? I sincerely doubt it.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

The suckers who bought into bank stocks a month ago thinking the worst of the credit crisis and financial company write-offs have mostly passed have seen much of their investment hammered.

And that is about to get worse. The easy-to-see reason is that mortgage paper is still losing value as housing prices continue to drop.

More ominous is the borrowing that banks are making at the Fed. According to Reuters, "Banks borrowed a record amount of funds from the Federal Reserve in the latest week as the year-old credit crisis took a persistent toll." That number hit $17.45 billion per day. In other words, the bank balance sheet problem is extending into the third quarter and may be getting worse.

The IMF has commented that the total write-off due to the mortgage debacle will hit $1 trillion. Only about 40% of that has been written off, which means that the next two or three quarters of earnings could be devastating.

Citigroup (NYSE: C) now trades at $18.59, against a 52-week low of $14.01. It has a market cap of $102 billion. If it has to raise another $15 billion to offset losses, especially if the stock sold to raise the money is below market, Citi's shares could move down to $12 or $13. Other large money center banks face the same trouble.

Banks will hit new lows before the end of the year.

Douglas A. McIntyre is an editor at 247wallst.com.

In this series, we take a look at the 25 stocks in the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.

I'll give you just one hint at the nature of the problems MGIC Investment Corp. (NYSE: MTG) is facing: MGIC stands for Mortgage Guaranty Insurance Corporation. In other words, things were going just fine for the Milwaukee-based firm until about, oh, mid-2007, when the slime known as subprime hit the proverbial fan.

What went wrong? At number 4 on our list of SPX stragglers, MTG lost 89% of its value from June 30, 1998 through June 30, 2008. From its July 2004 peak at $78.95, the stock is down 93%, and is now trading near all-time low territory.

In the first quarter of 2007, it was business as usual for MTG. The company announced plans to acquire its sector peer, Radian Group (NYSE: RDN), for $4.9 billion in the stock. The merger would have created a massive mortgage giant with about $15 billion in assets. Unfortunately, the deal was never consummated.

In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.

The suspense is over -- National City Corporation (NYSE: NCC) is the fourth and final Ohio-based regional bank to appear on our list of laggards. Based out of Cleveland, National City appeared to be faring well in the late 1990s. The bank had just completed some key acquisitions, and the stock was locked in a long-term uptrend. However, the next decade would prove considerably more challenging.

What went wrong? At number 6 on our list of SPX underdogs, NCC gave up 87% of its value from June 30, 1998 through June 30, 2008. The stock peaked at $40 in November 2005, and then edged sideways ... until it ran headlong into the subprime tsunami.

The first warning from NCC came in March 2007, when the bank said it would retain $1.6 billion previously set aside for non-conforming loans. In a filing with the Securities and Exchange Commission, NCC said it had recorded $11 million in write-downs through the first two months of the year, and suggested that a further write-down was "likely" before the loans were transferred.

In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.

Seattle-based Washington Mutual, Inc. (NYSE: WM) was doing just fine on the charts, thank you, until the entire financial-services sector was upended in 2007 by the twin evils of caustic subprime loans and the ensuing credit crunch.

While it's an honor it would probably just as soon not claim, WaMu is a prime example of an otherwise decent stock that got slammed by a macroeconomic stealth bomb.

What went wrong? At No. 9 on our list of SPX stragglers, WM shed 83% of its value during the 10-year period that concluded on June 30, 2008. Prior to June 2007, the stock was trending higher along support from its 50-month moving average. Double-top resistance near $46 proved difficult to surmount, but WM was holding up respectably ... that is, until the first shock waves of the credit crunch hit in spring 2007.

Following news of massive subprime-related losses at hedge funds owned by Bear Stearns, Wall Street's attention was suddenly riveted to mortgage loans and the banks that carried them on their balance sheets. During WaMu's first-quarter report, chairman and CEO Kerry Killinger attempted to reassure anxious investors with the optimistic statement, "Over the past 12 months, we have taken a number of prudent actions to reduce our exposure to the subprime mortgage industry ... [which] limited our exposure to the mortgage market's downturn and position us well to expand and grow as market conditions improve."

When it comes to the banking industry, the good news just keeps coming. The head of the FDIC says that only about 13% of the banks on its watch list of troubled institutions actually fail. Except for the banks that go out of business, how could it get any better?

"We work with the primary regulator to give them extra care and attention, to nurse them back to health or to sell them off to another institution," said FDIC Chairman Sheila Bair, according to Reuters.

The comments side-step the issue that the credit crisis is getting worse. The IMF recently said that it could not see a bottom for the housing market and that financial companies would end up with $1 trillion in write-offs before the troubles pass. Bill Gross, the head of huge bond house Pimco, has essentially said the same thing.

The comment from the FDIC chief may be accurate based on a snapshot of the market today. It fails to acknowledge that the current watch list is only the tip of the iceberg.

Douglas A. McIntyre is an editor at 247wallst.com.

In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.

First Horizon National Corporation (NYSE: FHN) operates as the holding company for First Tennessee Bank, making it one of many regional banks on our roster. If you're the intelligent, discerning audience that I assume you to be, I probably need only mention that FHN is in the mortgage-lending business for you to guess what might be ailing the stock.

What went wrong? At number 15 on our list of SPX laggards, FHN shed 76% of its value during the 10-year period ending June 30, 2008. The stock peaked at $48.65 in March 2004, but didn't start to plunge in earnest until July 2007. Say it with me, people: subprime.

While the share price didn't plummet immediately in response, FHN first revealed mortgage-related weakness in August 2006. The bank warned that quarterly earnings would be dented by deteriorating mortgage-market conditions, and profits fell during the next two quarters. FHN cited "lower gain on sale margins, further reductions in new mortgages and increased costs to hedge the servicing risks for mortgage loans" for the earnings weakness.

On September 4, 2007, FHN's head of employee services got chatty with The Memphis Daily News. John Daniel admitted that the bank was trimming its headcount gradually in a cost-cutting effort, but reassured the paper that the subprime crisis didn't have too deep an impact. "We don't see any significant reductions in staff as a result of what's happening in the mortgage industry right now," he asserted. Just a week later, on September 13, the Daily News reported that FHN was slashing 50% of its mortgage sales force, about 2,000 total positions.