Bailout not a done deal

[Zoocat]

After reading through a few threads it seems that many believe the bailout is a done deal. It's not. And now that the general outline has been revealed, there are some concerns that this bailout plan may not do anything to alleviate the fundamental problem of insolvency of these banks and institutions.

Paul Krugman says "No Deal" if the plan is to go into effect as outlined.
No deal - Paul Krugman - Op-Ed Columnist - New York Times Blog

I think that more economists will begin to weigh in on this tomorrow and Monday in the Wall Street Journal and the NY Times and others.

Please, folks, read Krugman's column, take a look at the outline of the plan, http://www.nytimes.com/2008/09/21/business/21draftcnd.html?_r=1&ref=business&oref=slogin and decide for yourself whether this bailout is going to do what Paulson claims it will. Then call or email your senator with your opinion.

This is a time in history that no one can afford to stand on the sidelines and say "There's nothing I can do" or "It's too complicated to understand." This is really really important.

 

[dex]

Bloomberg.com: Exclusive

Backlash Over Bailouts Grows in Congress, Wall Street

 

[Spanky]

Bloomberg.com: Exclusive

Backlash Over Bailouts Grows in Congress, Wall Street

The bailout will go forward since opposition is small in number.

 

[Zoocat]

Also, in the Sun NY Times. "Will It Work?"
http://www.nytimes.com/2008/09/21/business/21econ.html?_r=1&hp&oref=slogin

And "The Wall Street Bailout Explained"
http://www.nytimes.com/2008/09/21/business/21qanda.html

But the above article raises more questions, for me, than it answers. For example, the article says
"As for rescuing the financial system, elected officials in both parties became convinced that, while a couple of venerable investment banks could fade into oblivion or be absorbed by mergers, the entire financial system could not be allowed to collapse. "

There is a presumption that the financial system was going to collapse but no one has come forward to explain to us taxpayers exactly WHY it was going to collapse on Friday. What was going to happen? Why now? Why not next Friday? I think we need to demand more transparency from Paulson, et al.

 

[youbet]

This quote from the article Oldbabe posted is what worries me

Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check.

This isn't a time for this Congress to continue sitting on their hands waiting for "someone else" to "do something." This is the time for Congressional leadership, including the chairs of the economic and commerce committes, to step up with significant modifications to the Paulson - Bernacke proposals or even grab the bull by the horns and write one of their own. I'm going to be very, very disappointed if they pull yet another "we didn't like this but had no choice but approve it" caper they are becoming famous for.

 

[Zoocat]

YouBet, I agree. Congress needs to grow up on this one. When I saw the congresspeople from both parties coming out of the emergency meeting with Paulson and the rest, Nancy Pelosi looked sick and scared. Why can't we, the taxpayers, know what was said in that meeting?

 

[FIRE'd@51]

Krugman's point concerns me also. Clearly, Treasury should pay the "fair value" for this debt. If it overpays, it will be a cost to taxpayers.

The question is the value that the banks are carrying this debt on their books. Surely, some debt is being carried too low due to mark-to-market accounting where the price has been inefficiently set by "distress sales" in an illiquid market. In these instances, the Treasury can buy this paper from the banks at a higher price than the banks are carrying it on their books, which will help the banks' capital ratios.

In cases where the banks are carrying this paper at "fair value", further deterioration of their capital is likely to occur if the market becomes more illiquid (and inefficient). Treasury's presence should stabilize the market, as it will be a buyer for this paper at a price closer to intrinsic value. Furthermore, Treasury will not have to worry about interim marks, and can hold this paper until it converges to this intrinsic value.

 

[lets-retire]

Why can't we, the taxpayers, know what was said in that meeting?

Because 90% of the US population are easily scared. If all of the information were to be released the media would spin it up and scare the heck out of most people resulting in an overreaction by the populous. By holding everything in the populous doesn't know exactly what is going on and can't make the situation worse.

If you think people aren't scaredy cats look at the areas with hurricanes. Around here the gas stations cut off the outside credit cards machines causing longer lines at the pumps. People in turn believe the stations will run out of gas because there are always lines and fill up more often. Because there is "more demand" the gas stations can increase the price of the gas and make more profit. You can tell there is more demand because there are always lines at the gas stations.

 

[socca]

I'm running a nuclear power plant. I have 200 tons of radioactive waste to sell. Damn, the market for this waste is 'illiquid'. Where can I find a broker representing a buyer stupid enough to take this stuff off my hands? Hey! I have an idea! What's Paulson's phone number?

 

[donheff]

This is a particularly bad time for Congress to need to "grow a pair." Neither side will want to risk derailing this thing with an election coming. If they scuttle the plan and things get worse they will be an easy target - no one pays attention to the subtleties. If the plan doesn't work, the evidence will probably not be in right away and, even if it is, both sides can take cover under the fact that this one was bipartisan. Buying in takes the "capacity to act" (i.e., plan itself) off the table to a degree.

 

[OAG]

FWIW I agree that "we do not need to know" all of the details. Sometimes if you "cannot afford the answer, don't ask the question" makes sense. If we actually were close to a financial meltdown and the American people believed it, we would have had a real "run on the banks" as 150 million people withdrew their savings. We could not have afforded that, ATM's locked, accounts froze as banks ran out of funds, credit cards froze, where you could not get gas, food and anything else where you could not pay cash for it and then that would become doubtful as stores had to close down. Jobs disappearing and you can add the "doom and gloom" of your choice. However, will his process cure the problem? I am not so sure and with the need for Congressional approval to implement it the odds go down considerably IMHO. I just hope they can come together and "do something constructive" for a change. Most of what I read says this will not cause banks to lend money which seems to be a part of the real problem; it only "make it easier for them to do so". It is still their choice and they will tend to do only what their peer institutions are doing. Additionally, as I read this plan it does nothing to punish or to change the system for the better or in the future.

 

[Zoocat]

Should we also be recapitalizing foreign banks? Paulson says that's what we must do because Americans have exposure to these banks too.
Paulson: Foreign banks can use U.S. rescue plan | Reuters

 

[free4now]

FWIW I agree that "we do not need to know" all of the details.

How could any of the details be scarier than the one piece of information that has been revealed: 700 billion plus.

 

[Zathras]

How could any of the details be scarier than the one piece of information that has been revealed: 700 billion plus.

If one detail was that the cost will really be 1 trillion?

 

[Zoocat]

Obama has made a statement about the bailout. (I realize that these sources are from the Democratic side. Those with sources from the conservative side please post!) This issue is more important than partisan politics.

Obama's statement in part:
"No blank check. If we grant the Treasury broad authority to address the immediate crisis, we must insist on independent accountability and oversight. Given the breach of trust we have seen and the magnitude of the taxpayer money involved, there can be no blank check."

Barack Obama and Joe Biden: The Change We Need | Amanda Scott's Blog: Senator Obama's Statement of Principles for the Treasury Proposal

Many others are weighing in on the ramifications of this bailout.
One (very) long response from Stirling Newberry of the Daily Kos
Daily Kos: The Way Forward [Updated: Obama announces opposition to a blank check.]

Basically, he (Stirling of Daily Kos) says "Hell NO" to the Paulson plan and proposes that the FDIC take over the bailout.
In part:



"Thus the centerpieces of a counter congressional bill are:

1. Expansion of the FDIC to include money market funds, brokerages, and other financial funds. Institutions which are out of this expansion, if any, will be allowed to fail as a class. Assign the CBO as the Congressional means of oversight and give the CBO authorization to extend credit to the FDIC, which can be waived if, after Congressional review, the money is justified. Basically, anything that Bush does on the way out the door must be subject to review by the incoming Congress and Administration.

1. Authorization of an HOLC type cram down of mortgages with government liens, the profits of which are split between home owners and the mortgage system, now in taxpayer hands anyway. Place this process in the hands of the FHA, and have the CBO assigned to continuous oversight. Authorize some 20 billion dollars in stock to be purchased by the government.

1. Declaration of a national emergency, without expansion of the debt ceiling, and also with explicit judicial review. In the national emergency specific authorization can be given to review any transfer of effective control of banks or other financial entites. In this declaration can be rationing of gasoline, imposition of conservation and other austerity measures.

1. Dramatically expand safety net programs for the inevitable economic shock: food stamps, unemployment insurance, suspension of interest on student loans, loans to the government by members of the National Guard, active Military, or Reserve and so on.

In reading this over, it sounds like the government taking on extraordinary "emergency" powers. But then, would you rather Paulson take on dictatorial power without any oversight or later recourse for grievances?

 

[Gardnr]

FWIW I agree that "we do not need to know" all of the details. Sometimes if you "cannot afford the answer, don't ask the question" makes sense. If we actually were close to a financial meltdown and the American people believed it, we would have had a real "run on the banks" as 150 million people withdrew their savings.

Agreed. The real danger at this point is of a mass "run on the banks" (and everything financial). The cascading effect of all that fear causing all that money to be pulled out would be catastrophic.

Our money system is built on the confidence of people that it is worth something and is secure. If that confidence is destroyed, and people panic, we'll be in a world of hurt.

 

[free4now]

Runs on banks happen out of ignorance, not out of having a full understanding of the situation. We don't have to shove the details of the collapse on the public, just make them available for those who are motivated to find out more. The details are clearly going to be so convoluted and arcane that the impulsive people won't take the time to sift through. Is it possible that there is already a site or page where I can go to learn what congress now knows about how bad this is?

 

[free4now]

One sign of hope: In this article, Paulson seems pretty clear that his intention is not to pay much more for the assets what they will be worth:

"It would be extraordinary circumstances, highly unlikely, that the cost will be anything like the amount you spend for the assets."

 

[Zoocat]

One sign of hope: In this article, Paulson seems pretty clear that his intention is not to pay much more for the assets what they will be worth:

On July 11 2008 Reuters report that:

"U.S. Treasury Secretary Henry Paulson indicated that a bailout of Fannie and Freddie was unlikely despite financial market concerns that the agencies, which finance nearly half of U.S. homes, may have trouble raising enough money to keep buying mortgages."
Fannie, Freddie say they have plenty of capital | Reuters

Do I really need to post all the other lies?

 

[socca]

Paulson seems pretty clear that his intention is not to pay much more for the assets what they will be worth:

The problem is that many of these assets are worse than worthless - they are ticking time bombs that can explode in a cascade of escalating losses if the extremely complex bets they make should fail. This is why the folks who hold this toxic waste are so eager to unload it on the American taxpayer.

Declaration of a national emergency, without expansion of the debt ceiling, and also with explicit judicial review. In the national emergency specific authorization can be given to review any transfer of effective control of banks or other financial entites. In this declaration can be rationing of gasoline, imposition of conservation and other austerity measures.

Hello?? Do we live on the same planet?? The stock market falls 9% in two days and suddenly we need a national emergency declaration and $1 trillion in new national debt to 'fix' the problem?? If Wall Street has built a huge financial empire based on illusory wealth based on highly leveraged derivatives, then Wall Street deserves to contract back to a level representing its 'true' value. The folks who will disproportionally suffer during this contraction will be the same folks who disproportionally profited as the illusory financial empire was being built. I'm just not seeing the problem here. We do have extremely challenging underlying systemic economic problems, but these will not be solved by a new massive welfare program for Wall Street.

The battle over the bailout seems to be dividing along ideological lines, with the Repubs pushing for a Wall Street bailout, and the Dems pushing for a Main Street bailout. I guess this makes me a Libertarian - no bailouts for anyone. Pain is good if it is just. Greed and stupidity should be rewarded with pain so those affected will be less greedy and stupid in the future.

 

[Martha]

The battle over the bailout seems to be dividing along ideological lines, with the Repubs pushing for a Wall Street bailout, and the Dems pushing for a Main Street bailout. I guess this makes me a Libertarian - no bailouts for anyone. Pain is good if it is just. Greed and stupidity should be rewarded with pain so those affected will be less greedy and stupid in the future.

One reason why the depression was so bad was that there was no bailout. And the financial world stopped dead.

 

[youbet]

This is a particularly bad time for Congress to need to "grow a pair."

I agree Don. Still, I think it is a necessary time. What a horror it will be if whatever comes out of this is less than optimum and congresscritters who voted for it are busy CYA'ing saying they weren't given the right info, it wasn't their fault, etc. It's time to find out the facts, pick the most viable remedies and work-arounds and implement. It's not time to try to weasel into the best political position.

Think about the Iraq war votes...... I sure don't want senators and representatives back-peddling later on this issue like that one, for whatever legitimate or illegitimate reason. Get the facts! Step up and let your views be known! Take responsibility for the outcome! Become the most popular Congress in history instead of the least popular!

 

[clifp]

The problem is that many of these assets are worse than worthless - they are ticking time bombs that can explode in a cascade of escalating losses if the extremely complex bets they make should fail. This is why the folks who hold this toxic waste are so eager to unload it on the American taxpayer.

This is simply not true. Most of these assets are mortgages on homes and the land that they are built on. We can argue if these homes are worth 90,80, ... or 50 cents on the dollar, but they absolutely have value.

These entire "toxic" waste characterization is big part of the problem we are facing. Sure most of these loans should have never been made in the first place, and obviously a lot aren't be paid back, they aren't Worse than worthless.

 

[free4now]

I think he was talking about Credit Default Swaps (CDS) like AIG held, and other insurance-type assetts. It's quite possible that if things go bad the writer (insurer) of the CDS could be on the hook for up to the whole amount of the loan, which could be many times the "value" of the CDS.

This really is the issue: The value of all this toxic waste is extremely sensitive to how bad the foreclosure crisis gets. And nobody knows how bad it's going to get, so assigning a value at this time is essentially a matter of predicting the future. If you pay a low price that's essentially an admission that you think the future is going to be bad, and the fed doesn't want to give that impression. They are sure to overpay at least a little, if only to reassure people and make it look like the future is going to be okay.

 

[lets-retire]

The details are clearly going to be so convoluted and arcane that the impulsive people won't take the time to sift through.

I agree, but what would happen is the media would get the details and start the "what if" scenarios. In typical media fashion they would go to the worst case "what if" and scare the poop out of the everyday people who wouldn't know what they were reading in the first place. Those few who would be able to wade through the information would be able to figure out what is being said and understand it is not as bad as the media is making it out to be. For and example of how the media would handle the coverage, look at all of the natural disasters and how the media covers them.