No Wonder the $700 Billion Bailout 'Deal' Failed 28 comments
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This is the so-called $700 billion bailout "deal" that Democrats in the Senate and Hank Paulson agreed to without consulting enough House Republicans who are revolting against it with good reasons. My somewhat sarcastic comments are in bold type:
Agreement on Principles 1. Taxpayer Protection a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies.
False promises. Do "participating companies" include those that buy the distressed mortgage backed securities from the government after those securities are bought by Treasury from financial institutions? If so, no one would buy the securities from the government and the taxpayer would be stuck with worthless junk mortgages. An added thought: Would the government take equity in sovereign wealth funds, pension funds, hedge funds and endowments that took the securities off its hands?
b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing.
Equity sharing for sellers to the government or buyers from the government? The government obviously expects to buy low and sell high, but no one would buy from the government if he had to give up equity in his business to the government. There must be a better way to penalize the sellers than to take their equity. For one thing, if the government buys at 35% of par and is lucky enough to sell at 55% or higher, the seller has already paid a huge penalty and given the government a nice profit. Why take equity and make things complicated?
c. Requires most profits to be used to reduce the national debt.
Define "profits." Define "most." Why not use the profits to reduce the taxpayers' commitment to the rescue fund? How are taxpayers protected against Congressional earmarkers who will try to use the funds to build research labs to study the Polar Bear?
2. Oversight and Transparency.
God and Country.
a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law.
Define "acting," "arbitrary," "capricious." What existing laws would this bill amend? Which ones would not be amended by this bill? Looks like a full employment bill for lawyers and district attorneys.
b. Establishes strong oversight board with cease and desist authority.
Devil is in the details.
c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary's authority.
Maybe the Secretary will have a blog and sign up for YouTube. The idealism is great. Execution is what matters.
d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary's authority.
Doesn't Treasury already have an IG? I don't oppose this, but would have to see the final bill and the details.
e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse.
Doesn't Treasury already undergo GAO audits? Since it sells treasuries and other financial instruments routinely, isn't it ready to go, aside from the small details of designing systems to buy the mortgage backed securities?
3. Homeownership Preservation.
A broad generalization that has to be a deal killer. This continues the socialistic policies that got Fannie and Freddie in trouble.
a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure.
This should be in another bill. It makes this plan unworkable.
b. Requires loan modifications for mortgages owned or controlled by the Federal Government.
This freezes the blood of free market purists who don't want the government bailing out people who lied on their credit applications, got caught speculating in the real estate market and bought more than they can afford.
c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America's housing needs.
Socialistic earmarks by and for Democrats who thought they had the conservatives in a corner.
4. Funding Authority
a. Treasury Secretary's request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed.
The George Bush and Donald Rumsfeld war strategy—keep the cost of this war against a worldwide depression as cheap as possible even if it means it will last 100 years or until Americans tire of it and agree to wave the white flag to the terrorists who are trying to undermine our economy. Why haven't politicians learned that Americans won't stand for long wars against our enemies or against a depression? How would speculators game this incremental war against an economic implosion?
b. final $350 billion is subject to a Congressional joint resolution of disapproval
Just as members of Congress are in over their heads in trying to design this rescue effort, they would be out of their league when they tried to determine whether the program was working, whatever that means. And the political kneecapping that would ensue during the debate over whether to give Treasury the additional $350 billion would be a campaign fund raiser's delight.
Republicans have good reasons to fight this Christmas tree "deal." How Bush and Congressional leaders could approve this so-called deal or term sheet without seeing a bill is very hard to understand. That's Washington for you.
Stock position: None.
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This article has 28 comments:
Would you advocate giving Paulson $700b and tell him to go nuts without any oversight? Sounds like you'd prefer that.
I agree that some of the housing preservation stuff is too vague, but
Credit default swaps are contracts between dealers on stocks, bonds, mortgage backed securities or other financial instruments (collectively referred to herein as „securities‟) that can be hedged by selling the securities at the current market value. The credit default traders do not need to own any of the underlying assets to trade the contract. The nature of the credit default swaps is to profit from a future price decline of the underlying contract asset. The most profit is obtained if the security that is the asset for the contract declines to a price of zero. The credit default swaps are accounted for in the books of the major broker-dealers as „off balance sheet transactions‟, hidden from regulators and the investors in these broker-dealers.1 A standard way to profit from large credit default swaps is to trade a swapped contract for a future delivery of a security (several years from the contract date), then hedge the contract by selling the securities into the public markets or to investment funds, such as pension funds. These contracts can then be transferred in another credit default swap trade that can again be hedged by selling the underlying securities. Value of the Credit Default Swaps
The entire incentive for the traders of these contracts is to have the securities financially implode. The value of these so called „contracts‟, which generally require no investment by the contract holders, has been estimated to currently be 58 to 62 trillion dollars. These amounts are understated because only about 10% of the members of the reporting entity, called the International Swaps and Derivatives Association, voluntarily disclose their credit default swap positions.
1 For example: Citigroup Inc. 10-K filed 2/22/2008, Merrill Lynch & Co. Inc. 10-K filed 2/25/2008 and Wachovia Corp 10-K filed 2/28/2008.
To put 60 trillion dollars of these credit default contracts into perspective, the entire U.S. public retirement accounts only amounted to 17.6 trillion dollars at the end of 2007. Sixty trillion dollars is equal to the value of all publicly traded stocks listed on all major global stock exchanges.2 Just the credit default swaps reported equals the value of the companies that make up the world‟s economic engine. September 23, 2008 Senate Banking Committee Testimony of SEC Chairman Christopher Cox: “I will conclude, Mr. Chairman, by warning of another similar regulatory hole in statute that must immediately be addressed or we will have similar consequences. The $58 trillion notional market in credit default swaps to which several of you have referred in your opening comments that is double the amount that was outstanding in 2006, is regulated by absolutely no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimum disclosure to the market. This market is ripe for fraud and manipulation and indeed we are using the full extent of our anti-fraud authority, our law enforcement authority right now to investigate this market. Because CDS buyers don‟t have to own the bond or the debt instrument upon which the contract is based they can effectively naked short the debt of companies without any restriction potentially causing market disruption and destabilizing the companies themselves. As the Congress considers reform of the financial system in the current crisis I urge you to provide in statute for regulatory authority over the CDS market. This is vitally important to enhance investor protection and to ensure the continued operation of fair and orderly markets.”
“Holding a credit default swap is effectively or nearly effectively taking a short position in the underlying, but CDS buyers don‟t have to own the underlying, they don‟t have to own the bond or debt instrument upon which the credit default swap is based so they can effectively naked short it, this is a problem we have been dealing with, with our international regulatory counterparts around the world with straight equities and it‟s a big problem in a market that has no transparency and people don‟t know where the risk lies.”3 Please Consider
Money in Wall Street does not vaporize in a financial crisis; it is only transferred from investors to those Wall Street participants who benefit from market crashes. There have been very large credit default swap contracts and other methods of naked short selling used against U.S. securities. There is an incentive for the small number of profiteers in these large naked short positions to crash the value of the underlying securities, but this will, as it already has begun to, crash the U.S. economy. These profiteers can then conceal the fact that they have previously stolen the money from the financial system by selling securities they created from sham contracts. There are vast pools of money gained from this activity by a small number of identifiable participants and if the U.S. cannot counteract these pools, financial devastation is assured.
2 World Federation of Exchanges, Annual Equity Market Statistics, Domestic Market Capitalization report. 3 Senate Committee: Banking, Housing and Urban Affairs Hearing in Washington D.C., September 23, 2008, U.S. Credit Markets and Federal Rescue Plan.
Its interesting that those who created the problem are now going to solve it. It sure looks like they are trying to save their buddies. Interestingly, there doesn't seem to be any shortage of buyers for the pieces of the failed enterprises that are sound and worth something.
Finally, all the usual suspects (GS, MS, JPM etc) are lining up to get a piece of managing the biggest pie even they have seen in a while. Would they possibly skim off the best parts for themselves and their favorite clients? Nah, they're way too ethical for that.
Let Bush and Paulson figure out another way of lining their pockets at our expense.
What is really needed is deleveraging. By everybody, including government. Yes some sort of cushion is needed while this deleveraging is happening to prevent depression. But any solution that does not reduce debt in the long run is no damn good.
TRANSFER OF A PERCENTAGE OF PROFITS.
DEPOSITS.Not less than 20 percent of any profit realized on the sale of each troubled asset purchased under this Act shall be deposited as provided in paragraph (2).
USE OF DEPOSITS.Of the amount referred to in paragraph (1)
65 percent shall be deposited into the Housing Trust Fund established under section 1338 of the Federal Housing Enterprises Regulatory Reform Act of 1992 (12 U.S.C. 4568); and
35 percent shall be deposited into the Capital Magnet Fund established under section 1339 of that Act (12 U.S.C. 4569).
REMAINDER DEPOSITED IN THE TREASURY.All amounts remaining after payments under paragraph (1) shall be paid into the General Fund of the Treasury for reduction of the public debt.
OH my! What a load of crap! So you're saying lets break contract law, thus guaranteeing no new mortgages offered in the future. What company would ever enter into a mortgage contract if the government was so reckless as to break the contracts as they desired?
Secondly, you're missing the point of the fact that this crisis has roots into the Clinton adminstration's rewrite of the mission of Fannie Mae and Freddie Mac. in 1994 Clinton unveiled his National Homeownership Strategy, which broadened the CRA in ways Congress never intended. Clinton saw homeownership as a way to open the door for blacks and other minorities to enter the middle class. In 1995, Clinton had Robert Rubin rewrite the CRA rules. Banks were given strict new numerical quotas and measures for the level of "diversity" in their loan portfolios. Getting a good CRA rating was key for a bank that wanted to expand or merge with another. Loans started being made on the basis of race, and often little else. Between 1997 and 2001, Clinton's HUD secretary, Andrew Cuomo, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. Among those decisions were changes that let Fannie and Freddie get into subprime loan markets in a big way. Other rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks.
Since they could borrow at lower rates than banks due to implicit government guarantees for their debt, the government-sponsored enterprises boomed.
With incentives in place, banks poured billions of dollars of loans into poor communities, often "no doc" and "no income" loans that required no money down and no verification of income.
Worse still was the cronyism.
Fannie and Freddie became home to out-of-work politicians, mostly Clinton Democrats. An informal survey of their top officials shows a roughly 2-to-1 dominance of Democrats over Republicans.
Then there were the campaign donations. From 1989 to 2008, some 384 politicians got their tip jars filled by Fannie and Freddie.
Over that time, the two GSEs spent $200 million on lobbying and political activities. Their charitable foundations dropped millions more on think tanks and radical community groups. From 1995 to 2005, a Harvard study shows, minorities made up 49% of the 12.5 million new homeowners.
Much of the above is taken from an article written by Terry Jones of Investor's Business Daily Sep 24, 2008
This idea sounds just crazy enough to possibly work, so naturally it
won't
be given serious consideration. ?How great is our bureaucracy!!
Hi Pals,
I'm against the $85,000,000,000.00 bailout of AIG.
Instead, I'm in favor of giving $85,000,000,000 to America in a We
Deserve
It Dividend.
To make the math simple, let's assume there are 200,000,000 bonafide U.S.
Citizens 18+.
Our population is about 301,000,000 +/- counting every man, woman and
child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billion that equals
$425,000.00.
My plan is to give $425,000 to every person 18+ as a We Deserve It
Dividend.
Of course, it would NOT be tax free.
So let's assume a tax rate of 30%.
Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage - housing crisis solved.
Repay college loans - what a great boost to new grads
Put away money for college - it'll be there
Save in a bank - create money to loan to entrepreneurs.
Buy a new car - create jobs
Invest in the market - capital drives growth
Pay for your parent's medical insurance - health care improves
Enable Deadbeat Dads to come clean - or else
Remember this is for every adult U S Citizen 18+ including the folks who
lost their jobs at Lehman Brothers and every other company that is
cutting
back. And of course, for those serving in our Armed Forces.
If we're going to re-distribute wealth let's really do it...instead of
trickling out a puny $1000.00 ( 'vote buy' ) economic incentive that is
being proposed
by one of our candidates for President.
If we're going to do an $85 billion bailout, let's bail out every adult U
S
Citizen 18+!
As for AIG - liquidate it.
Sell off its parts.
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.
Here's my rationale. We deserve it and AIG doesn't.
Sure it's a crazy idea that can 'never work.'
But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion
We Deserve It Dividend more than I do the geniuses at AIG or in
Washington
DC
And remember, The Birk plan only really costs $59.5 Billion because $25.5
Billion is returned instantly in taxes to Uncle Sam.
Ahhh...I feel so much better getting that off my chest.
Kindest personal regards,
Birk
T. J. Birkenmeier, A Creative Guy & Citizen of the Republic
PS: Feel free to pass this along to your pals as it's either good for a
laugh or a tear or a very sobering thought on how to best use $85
Billion!!
This whole charade is nothing but misdirection with the results being unpredictable, and probably just as bad if not worse then the course we are on now.
If the credit markets are seizing, which credit markets. Short term financing (30-90 days)? Intermediate term (3-6 years), or long term?
If you don't have the data as to what is wrong, then how in the world are you to craft an appropriate solution? Washington has a huge "Credibility Gap" with the public and they are not helping matters here. The perception (right or wrong) is throw money at Wall Street.
In my experience, throwing money at a problem very rarely solves the problem.
by the following formula:
VESTING OF SHARES.—If, after the pur
chase of troubled assets from a financial institution,
the amount the Secretary receives in disposing of
such assets is less than the amount that the Sec retary paid for such assets, the contingent shares re-
ceived by the Secretary under paragraph (1) shall
automatically vest to the Secretary on behalf of the
United States Treasury in an amount equal to
(A) 125 percent of the dollar amount of
the difference between the amount that the Sec11
retary paid for the troubled assets and the disposition price of such assets; divided by (B) the amount of the average share price of the financial institution from which such assets were purchased during the business
14 days prior to the date of such purchase.
In other words, equity participation is security for purchase of the troubled asset, and only kicks in if the asset produces a loss for the Treasury. Why would that
deter participation? A seller receives capital and reduces
overhang on it's balance sheet. Right now, banks are
scrambling to raise capital through the sale of equity, preferred shares, warrants, without disposing of the toxic paper.
The banks don't have to participate. They can take or leave the deal. The screwed themselves. Why screw the taxpayers while unscrewing the banks?
Lenin 10
Marx 3
Keynes 1
Walras 0
Pareto 0
Knight 0
Didn't you notice $85,000,000,000 divided by 200,000,000 doesn't equal 425,000, it equals 425.
Not quite enough to pay off the mortgage, but enough for a day at Disneyland.