Bailout Bill #2: the fight begins

[socca]

Bush: A 'Critical Moment' for Economy - washingtonpost.com

Instead of simply purchasing distressed assets from financial institutions, some Democratic economists favor injecting lenders with cash in exchange for stock, letting the institutions figure out what to do with the mortgage-backed securities and other troubled assets weighing down their books.

A Democratic bill would also include more money for homeowners in or facing foreclosure and would change the bankruptcy law to allow judges to adjust mortgage repayment terms. But Democratic leaders would have to ensure that the measure could survive a filibuster in the Senate and would be signed by the president.

I'm confused. If this is a 'Democratic' proposal, then why did more Dems than Repubs vote in favor of Bailout Bill #1? It seems like the Dem vs. Repub distinction isn't useful in the bailout fight.

Another way to divide the pie would be into people who advocate using taxpayer money to:
1. cover Wall Street gambling debts, and/or
2. cover Main Street gambling debts, or
3. cover no gambling debts

 

[al_bundy]

my idea is for Uncle Sam to buy up the homes out of foreclosure. pay the principal balance, toxic loan is gone and rent the home out back to the previous owners

 

[haha]

We should leave the homeowners/mortagers alone. What if we do succeed in propping up house prices? People will sell, new people newly emboldened by the bailout will get new mortgages at unserviceable levels, and it's off to the races again.

The basic problem is that buyers have bitten off more house than they, or our economy, can chew. This stuff is economically obsolete, especially now that energy costs are on what is likely a permanent uptrend.

Three families or 10 individuals need to be living in thee monsters, or they need to be razed and the land put back to growing switch grass for ethanol.

Liquidate homeowners, liquidate home builders, liquidate every stupid uneconomic thing from the last 15 years. Liquidate stupidity!

And if the voters don't like it, well who said votes have to be counted? Just talk to Fidel.

Ha

 

[FinanceDude]

I'm sure a "plan" is forthcoming, flush with watered-down regulation and fresh earmarks.......

 

[cjking]

Economist on the radio this morning said you need to do two things, the original plan would only have done the first.

1. Isolate the bad assets by buying them up.
2. Inject capital.

I think he suggested recapitalising could (partly?) be done by converting existing debt into equity. i.e. compulsorily apply the sort of process that would be done in individual bankrupties to the industry as a whole.

He said 1. was a prerequisite to 2. If it wasn't done first, 2. would be inefficient because you wouldn't know where new capital needed to go.

 

[FinanceDude]

Economist on the radio this morning said you need to do two things, the original plan would only have done the first.

1. Isolate the bad assets by buying them up.
2. Inject capital.

I think he suggested recapitalising could (partly?) be done by converting existing debt into equity. i.e. compulsorily apply the sort of process that would be done in individual bankrupties to the industry as a whole.

He said 1. was a prerequisite to 2. If it wasn't done first, 2. would be inefficient because you wouldn't know where new capital needed to go.

He forgot number 3. Increase regaulation and oversight so this doesn't happen again.

 

[socca]

Here is Obama pontificating (a little) on Bailout Bill #2 (you can skip over the McCain-related stuff if desired):

Analysis: With bailout, McCain reaches dead end

While I, like others, am outraged that the reign of irresponsibility on Wall Street and in Washington has created the current crisis, I also know that continued inaction in the face of the gathering storm in our financial markets would be catastrophic for our economy and our families...

One step we could take to potentially broaden support for the legislation and shore up our economy would be to expand federal deposit insurance for families and small businesses across America who have invested their money in our banks.

"The majority of American families should rest assured that the deposits they have in our banks are safe. Thanks to measures put in place during the Great Depression, deposits of up to $100,000 are guaranteed by the federal government."

To me, this seems like a tiny little thing, but it would certainly make life easier for me and my extended family (fewer bank accounts to open as we shovel money around). However, my family's interests don't correspond to those of the average family struggling to make ends meet, so I wonder why Obama is even bringing this up.

 

[socca]

Here is what the A.N.S.W.E.R Coalition has to say:

We demand:
* An immediate moratorium on foreclosures, evictions and rent hikes.
* Extend unemployment benefits at full pay for everyone without a job.
* Open the books of the banks for public inspection
* Criminal prosecution of banking, finance, insurance and all other executives whose companies have benefited from the foreclosure crisis.
* An end to the wars on Iraq and Afghanistan, which cost $430 million per day.
* Hurricane and flood victims must receive full assistance and have the right to return to their homes.
* Creation and funding of jobs programs throughout the country to eliminate unemployment.

Maybe I lead an overly protected life, but things don't seem bad enough to warrant some of these measures.

 

[lazygood4nothinbum]

my idea is for Uncle Sam to buy up the homes out of foreclosure. pay the principal balance, toxic loan is gone and rent the home out back to the previous owners

&

We should leave the homeowners/mortagers alone. What if we do succeed in propping up house prices? People will sell, new people newly emboldened by the bailout will get new mortgages at unserviceable levels, and it's off to the races again

how about simply slowing down such sales by providing homeowners incentives to stay put such as increasing capital loss write offs such that the longer you hold the more you can write off & carry-over into the future. if you stay long enough, maybe you won't have to write off because the system will right itself.

 

[ziggy29]

Extend unemployment benefits at full pay for everyone without a job.

Please lay me off.

Please lay me off.

Please lay me off.

Please lay me off.

Please lay me off.

Please lay me off.

 

[al_bundy]

&


how about simply slowing down such sales by encouraging homeowners to stay put by increasing capital loss write offs such that the longer you hold the more you can write off & carry-over into the future. if you stay long enough, maybe you won't have to write off because the system will right itself.

the big problem is that with the loans adjusting to higher rates the people that took out these loans can't pay them and accounting games on tax returns won't help. especially the option arms and pick a payment or whatever. so the government buys the home at the remaining principal balance. The Paulson plan wanted to buy the bonds and pay the banks 30 years of interest as well as a form of handout. and the paulson plan was only going to buy the loans from a few select banks.

rent the homes out to the current owners and sell them over the next 10 - 20 years or however long it takes.

it's also better for the local governments since the US will be paying the property taxes where failed banks may not pay them and cause all kinds of problems.

 

[al_bundy]

Here is what the A.N.S.W.E.R Coalition has to say:



Maybe I lead an overly protected life, but things don't seem bad enough to warrant some of these measures.

george soros would make a fortune shorting the dollar

 

[lazygood4nothinbum]

the big problem is that with the loans adjusting to higher rates the people that took out these loans can't pay them and accounting games on tax returns won't help. especially the option arms and pick a payment or whatever. so the government buys the home at the remaining principal balance.

right, sorry, i keep forgetting some people buy what they can't afford. i must be from a different planet.

could at least help those who can afford it but might walk anyway.

 

[al_bundy]

plan C is no bailout for homeowners at all. Simply make the SS Trust Fund temporarily available to invest in the Commercial Paper market for any corporation rated investment grade to help with their funding needs while the credit markets are frozen.

the entire CP market is only $300 billion or so including hedge funds so it's going to be a lot less than that. most companies use the short term debt markets for working capital and a lot of people are going to get laid off who had no connection to the housing bubble just because companies are in a cash crunch

 

[socca]

Here is a typically pro-Bailout #2 slanted story:

Stock Markets Up as Investors Await Congressional Action - washingtonpost.com

After fleeing the market yesterday, some investors have regained confidence that the legislation will eventually pass, unleashing bargain hunters today, analysts said. They hope that the sell-off will bring more urgency to the debate, they said."The market has sent a message to Congress that yesterday is just the beginning if something isn't done," said Peter Cardillo, chief market economist with New York-based Avalon Partners. "I don't think it's going to take much longer. I think Congress has gotten the message."

Some problems:
+ are there really omniscient analysts who can peer into investors' heads and know what they are thinking?
+ it is not the business of the taxpayer to rescue the stock market. We aren't all equity investors.
+ catastrophic prediction: no bailout = collapse of stock market. Who has the infallible crystal ball?
+ what, exactly, is the message? Massive new deficit spending, but don't much care how you spend it? Bail out Wall Street? Bail out Main Street?

 

[socca]

Exact same pro-Bailout #2 slant, from the AP:

Stocks surge higher; credit worries persist - Yahoo! News

Without a bailout plan in place to absorb soured mortgage debt and other bad loans from battered banks, investors are left wondering what might restore confidence in lending.

If it doesn't pass, then look out below," said Jason Weisberg, an NYSE trader for Seaport Securities. "It could get ugly."

..the main worry for traders is that a lack of a plan will make it nearly impossible for some companies to fund basic operations like making payroll. Participants in the credit market buy and sell debt that companies use to finance operations.

The benchmark London Interbank Offered Rate, or LIBOR, that banks charge to lend to one another rose sharply Tuesday, making it more expensive and difficult for consumers and businesses to borrow money. In addition, credit card debt and more than half of adjustable-rate mortgages are tied to LIBOR, so an increase isn't welcome for many consumers.

LIBOR for 3-month dollar loans rose to 4.05 percent from 3.88 percent on Monday. LIBOR for 3-month euro loans, meanwhile, rose to 5.27 percent, from 5.22 percent Monday.

Do those LIBOR rates seem catastrophic to you? Not to me - I lived through the hyper-inflation of the late 70's where the fix was for the Fed to send short rates to 15%.

 

[clifp]

. The Paulson plan wanted to buy the bonds and pay the banks 30 years of interest as well as a form of handout. and the paulson plan was only going to buy the loans from a few select banks.

rent the homes out to the current owners and sell them over the next 10 - 20 years or however long it takes.

it's also better for the local governments since the US will be paying the property taxes where failed banks may not pay them and cause all kinds of problems.

Could you point out the provision in the plan where the banks got the 30 years of interests? AFAIK we the tax payers collected the mortgage payments once we bought the loans. Considering that Uncle Sam is still loaning money at below <4% (amazing in my view) and collecting mortgage payments at interest rate of ~10% (assuming we the taxpayers are buying the bonds at ~.50 on the dollar) this seems like a pretty nice spread.

 

[cardude]

Do those LIBOR rates seem catastrophic to you? Not to me - I lived through the hyper-inflation of the late 70's where the fix was for the Fed to send short rates to 15%.

I own a small car dealership, and my floorplan rate is tied to 1 month LIBOR and floats month to month, as do all car dealerships. A floorplan is simply a loan against vehicle inventory-- no new car dealer has all their cash tied up in their inventory because of the large amount of inventory we have to carry. LIBOR recently jumped about 3/4 of a point, so my $1,500,000 floorplan (very small compared to most dealers) now costs me almost $1000 more per month. So, while most people are unaffected directly by LIBOR increases, indirectly they could be as it drives up the cost of doing business.

 

[barbarus]

We should leave the homeowners/mortagers alone. What if we do succeed in propping up house prices? People will sell, new people newly emboldened by the bailout will get new mortgages at unserviceable levels, and it's off to the races again.

The basic problem is that buyers have bitten off more house than they, or our economy, can chew. This stuff is economically obsolete, especially now that energy costs are on what is likely a permanent uptrend.

Three families or 10 individuals need to be living in thee monsters, or they need to be razed and the land put back to growing switch grass for ethanol.

Liquidate homeowners, liquidate home builders, liquidate every stupid uneconomic thing from the last 15 years. Liquidate stupidity!

Wisely said.


And if the voters don't like it, well who said votes have to be counted? Just talk to Fidel.
Or many members of the US Congress.

Ha

And let's see what they can instigate next!!!

 

[Gone4Good]

Here is what the A.N.S.W.E.R Coalition has to say:

We demand:
* An immediate moratorium on foreclosures, evictions and rent hikes.

Great! So when can I stop paying my mortgage?

 

[socca]

So, while most people are unaffected directly by LIBOR increases, indirectly they could be as it drives up the cost of doing business.

My extended family's small business is also affected, highly indirectly. My point was that we are in elevated pain mode, not catastrophe mode.

 

[socca]

Here's another proposal:

Tony and Richard Ressler: A Better Alternative

A bailout proposal that will work needs to unambiguously address the issue that Secretary Paulson and Chairman Bernanke have identified as the principal threat to our nation's economic well being. That threat has been identified as the unwillingness of banks to lend to each other or to non-bank borrowers. The purported reasons for this unwillingness to lend is that mark to market markdowns of "toxic securities" on bank balance sheets will shrink their equity base, reducing their ability to lend to bank and non-bank borrowers. In addition, markdowns on the balance sheets of their fellow banks who they might lend to will undermine the creditworthiness of those banks leaving the lender bank with a bad loan to a borrower bank.

The solution proposed by Treasury is to create a $700 billion buyer of these "complicated" securities that will cause the market to value these "toxic securities" at a price closer to their "yield to maturity value" rather than the "fire sale" prices that are currently being offered. Becoming the buyer of the last resort for the $14.8 trillion U.S. residential and commercial mortgage market seems to be an extremely indirect way of bolstering the capital accounts of U.S. banks.

A better alternative to the current plan is a simpler and far easier to implement plan that directly addresses the ability of U.S. banks to increase their capital accounts and their willingness to lend to bank and non-bank borrowers.

The proposal is simple. Any "FDIC insured" financial institution in need of capital can raise 10% preferred stock plus warrants (struck at 90% of the prevailing market price/value of their common equity) from the U.S. Government's bailout fund. Generally the same structure and yield offered to Goldman Sachs by Berkshire Hathaway in its recent $5 billion preferred stock issuance. The fund would need only $350 billion to achieve its goal of restarting lending as all FDIC insured institutions had a total of $1.4 trillion of equity capital and only $300 billion of "toxic" mortgage securities on their books as of June 30.

If we Americans had a responsible Congress, proposals like this would be carefully studied alongside the Paulson and other proposals before any decision was made on how to best utilize our [future] tax dollars.

 

[socca]

The latest from the NY Times:

http://www.nytimes.com/2008/10/01/business/01bailout.html?pagewanted=1&_r=1&hp

As they studied the vote tally from the surprising defeat of the bill in the House on Monday, strategists said they were identifying lawmakers who they thought could be persuaded to back a revised plan.

One idea, an increase in federal bank deposit insurance, gained momentum after it was endorsed early Tuesday by both Senators John McCain and Barack Obama, the presidential candidates. Another idea under discussion was to extend jobless benefits for people who had been out of work for months.

As President Bush, Mr. McCain and Mr. Obama called for Congress to act, all sides indicated that any revisions would be modest to a plan to spend up to $700 billion to buy distressed securities.

The two ideas are just more window dressing, and change nothing. The core of Bailout Bill #2 will the same as Bailout Bill #1: using taxpayer money to cover the gambling losses of Wall Street speculators.

 

[al_bundy]

actually the FDIC part is the big one and i think the bailout part is dead. there is also talk of amending the tax code so that corporations can bring back dollars from overseas

 

[Gone4Good]

Do those LIBOR rates seem catastrophic to you? Not to me - I lived through the hyper-inflation of the late 70's where the fix was for the Fed to send short rates to 15%.

Well if I don't really understand how the banking system works, then no.

Central banks around the world injected hundreds of billions of dollars of new liquidity into the market yesterday to try to bring interest rates DOWN. Notwithstanding that, the overnight LIBOR rate increased the most on record (431bp). Yields on CP climbed 171bp. Rates on CP backed by assets (like credit card receivables) increased 229bp.

What you don't seem to understand is that the short-term lending market is shutting down. This isn't the same thing as the 1980's when credit was readily available at a price. We're running dangerously close to a situation where credit isn't available at all, at any price.

According to Bloomberg News:

``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''