Six Paths to Possible Bailout Success

As the corpse of the bailout bill lies at the feet of the House of Representatives, everyone -- Republicans and Democrats on the Hill, the Bush administration, presidential campaigns -- has expressed a determination to go back to the table. There's one catch: No one agrees on the fundamentals.

Treasury has been wedded to a plan that's built around the federal government buying distressed assets from beleaguered financial institutions. But that is precisely what two-thirds of House Republicans oppose and why on Monday they voted against the bailout package that their president went on national television to sell, that their nominee suspended his presidential campaign to promote, and than even their top renegade leaders came to support.

Unless the financial situation becomes incredibly dire (yes, more dire than European bank bailouts, forced financial mergers in the U.S. and general carnage in the stock markets) in the coming days, it's hard to see those House Republicans reversing their votes.

Against that backdrop, the options are few:

MCCAIN COMES BACK AND WRITES HIS OWN PLAN. John McCain is on record as suspending his campaign because of this crisis. He only unsuspended it -- officially anyway -- when the crisis seemed to be passing. Now that things have become untethered, isn't it his responsibility to resuspend his campaign and come back to Washington and lead his party to a bill it can support? Obviously, his last trumpet blow fell on deaf ears. Now he needs to come back and take the bull by the horns, Teddy Roosevelt style.

THE FED GOES SOLO. Basically, the Fed can do a lot of the Treasury plan on its own through the discount window. It can trade Treasuries for crappy assets. It's got a limitied amount of money, and it would have to open the window to the likes of mortgage brokers, but it could do some of it independently.

PAULSON REDUX. Another scenario is that the market tanks, enough leaders recant their no votes, and they basically back some version of Paulson's original plan. Unlikely? Yes. Impossible? You never know.

LET BOEHNER WRITE IT. The House Republicans may be trying to blame House Speaker Nancy Pelosi for the measure's defeat. But the botttom line is that 60 percent of House Democrats supported this mostly Bush Administration plan while two-thirds of Republicans balked. The best bet now is for the House Republicans to write a proposal built around their insurance idea.

If it works, great. If not, we'll come back and do this again. But there's no way to repackage the basic Paulson plan and sell it again -- unless the market continues to tank and the Republicans cry uncle. TMonday's near 8 percent drop -- that's 777 points if you're keeping score at home -- in the Dow didn't seem to weaken their resolve. Maybe a couple of thousand points more will.

BACK TO AD HOC BAILOUTS. Assuming there's no massive credit freeze, the Fed and Treasury could continue along with bailouts as they did with Bear Stearns and A.I.G. It's not an ideal solution but it's basically what we've been doing and it could continue. It seems less likely now that there aren't these things called investment banks anymore.

MCCAIN-OBAMA. They work out a plan together. They sell it to members of both their parties. It seems impossible. After all, they both endorsed the last plan and no one bought it. But maybe the fear of God and the direct imprimatur of the candidates will get them over the finish line.

Comments

[zanardm:]

Does anyone want a bailout of Hedge funds? Totally unregulated - you know why. So they can all be bankrupt; but will find out at a pro forma mark to market once a year maybe. Hedge can cleverly unload any toxic holdings such as mortgage backed bonds etc. to another more open firm, which then can unload such holdings to the gov, which are marked to market once a year maybe. So no bail out. Also introduce dual currencies, such as eurodollar for currency and accounting. Not so different from American firms in the City in London? Hence competition, wherein we trust the stability of the eurodollar more than what the politicians have done to our currency (-30%), which results in a 30% premium on our number one import, oil. We must have less government spending, in order to restore confidence in our currency and bonds, for a debtor nation. Nice work House of Representatives.

2008 Oct 01 01:15 AM

[russ:]

The insurance idea of the House Rebubs does not make sense. "Insuring' them gives some incentive to walk away from the mortgages, thus certain loss for the insurer, ie: the taxpayer. The misnamed 'bailout' allows for potential refinance or workouts to reduce foreclosures and thus minimize loss and further distressed property on the market. Insurance means an indeterminate cost to taxpayers but no potential upside or gain.

Under the bailout option, most of the mortgages will be good and the ability to avoid panic or disreesed sales could mean eventual either a small loss for the taxpayers or an actual gain, such as occured in the loans to Chrysler and Mexico.

The options are not perfect but the Hosue Repubs are idiots and zanardan is their cheerleader and enabler.

2008 Oct 01 08:42 AM

[JLarkin:]

Russ: the bailout plan will be administered with no real effective oversight by the Treasury which is full of Goldman Sachs executives who want to rescue their heritage industry. What will they pay for the toxic crappy securities? My guess is they'll pay 80-90 cents on the dollar for securities to recapitalize the banks, and that in the *long* run these securities will probably be worth around 20-30 cents. The housing bubble popped, it's not "coming back". Supposing that the taxpayers may someday see a profit is a fantasy. Taxpayers directly purchasing the toxic stuff is not the best way to resolve this crisis, as 200 economists have just pointed out in a petition against the bill. Even though I'm sure the bill appeals to all those who are "in" the financial business, including many in the media.

2008 Oct 01 09:43 AM

[Jason Rines...:]

Yep, you got it JLarkin. It is very mean and sited of the banking cartel to do this to the American people, but this is more of the same behavior from the irresponsible and totally selfish. The powerful always dictate to the weak, that's fact but ignoring the citizenship for years and fleecing them in the process was incredibly stupid. Too bad few in power read history about the middle class and the ramifications of such behavior.

The American people are not seeing anything on capitulation in there favor, such as loan restructuring or investment into infrastructure spending that would create jobs to pay the debts of some of the excesses from Wall St and themselves.

It is well know Washington has been out of tune with it's citizens for years. But the sorry part is that the American public is not as dumb as Washington or the banking cartel thinks. That pesky thing called the Internet is owned by even the poorest of our population, that means advanced information the public is available unlike other financial crisis times like 1929, 1907, 1966 etc.

A bill may well be rammed down the throats of the citizen at the end of the day but for every action there is an equal reaction. Washington must begin choosing between it's citizenship and foreign investment/lobby. I choose American citizenship first and forced restructuring of debt with soverign nations. Yes, oil would go to $200 but then Washington would be forced to do energy independence post-haste. That would create millions of jobs. My opinion is that we are a little damned if we do take care of the citizens first but very damned if we don't.

2008 Oct 01 01:01 PM