Tentative Bail-Out Plan Reached

[Retire Soon]

A tetative Bail-Out Plan has been reached. Are you satisfied with it?

Lawmakers Reach Tentative Bailout Deal - WSJ.com

 

[VaCollector]

Let's hope that it holds together better than the 1 o'clock version last Thursday that fell apart by 4 o'clock!!

 

[Spanky]

Under the plan, the federal government would purchase mortgage-backed securities and other bad debts held by banks and other investors.

Gee! What kind of deal is this? It's hoped that they will only buy at a steep discount.

"The legislation would place "reasonable" limits on severance packages for executives of companies that benefit from the rescue plan, said a senior administration official who was authorized to speak only on background."

Great -- that means there will be no limits. This is a really great country in which you can run a company into the ground and still can receive millions of dollars.

 

[Gone4Good]

Sounds a lot like the deal they had on Thursday . . .

 

[W2R]

To me it seems that the only way to fix this mess is to buy up the mortgages so that lenders, who were under the gun from the federal government to lend to those with less than great credit, won't fail. That is the government's responsibility given the way things played out.

the legislation will include provisions giving Treasury the ability to work with cash-strapped homeowners whose mortgages are purchased by the federal government to refinance into a more affordable mortgage.

This is the part I question. Are people who really couldn't afford these houses to begin with, but were lent this money anyway, going to be let off the hook and not have to pay full price like the rest of us? Will they end up with a more valuable house than mine and credit scores as good as mine? I do not want to pay for the home of someone who irresponsibly borrowed more than he could afford, simply because it was offered to him.

I guess my opinion depends on what is meant by the verbiage I quoted above. If it means refinancing the full balance owed at the present mortgage rates, then the government would not have to do anything but guarantee the new mortgage. That is fine with me. However, I wonder if it means forgiving part of the mortgage and allowing the "homeowner" to keep his McMansion for the same price as I paid for my simple, median home. I would oppose that.

I don't know much about mortgages but I am thinking that arranging a 50-year fixed rate mortgage instead of a 30-year mortage would help, or forgiving half the mortgage amount on the condition that half or more than half of the proceeds when selling the home would go back to the government. This type of maneuver would be OK with me, I suppose.

 

[OAG]

The Devil is going to be in the details. I assume it will not actually be approved today since the Govt Printing Office will be working all night printing it up. Anyone want to bet on the final printed length? Bet it will be hundreds of pages long, extremely difficult to read, and something that will be argued for years to come especially if it does not work.

Do we have to pay these folks overtime pay since they worked the weekend or do they just take an extra week or so off next "recess"!

 

[dex]

The summary also said the legislation would institute new executive compensation requirements for participating companies, including "no multi-million dollar golden parachutes," limits on compensation generally, and the ability to recover "bonuses paid based on promised gains that later turn out to be false or inaccurate."
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I wouldn't hold my breath that this will get the top guys. They usually have contracts that outline their severance package. A contract could only be changed if a company declares bankruptcy or with the agreement of the signatories.

 

[HFWR]

I wouldn't hold my breath that this will get the top guys. They usually have contracts that outline their severance package. A contract could only be changed if a company declares bankruptcy or with the agreement of the signatories.

Federal marshalls holding custom-made shackles might induce them to renegotiate in good faith...

 

[brewer12345]

I suspect that we will see a wave of CEO resignations just before their firms accept help from the gummint. That way they "take the blame" by getting tossed out the window, keep their severance $$$, and comply with the terms of the deal. Anyone new who assumes control will have to live with the restrictions, but the guys at the helm when the wheels came off the bus will probably walk away with their contractual due. Get over it; its a sideshow.

Any CEO of a financial firm who is still in place when all ths is over deserves whatever they are paid, IMO, so long as their firm came through this not needing the bailout.

 

[HFWR]

But it's so easy to blame "them", whoever "them" is...

Problem is, "them" is "us". No, I don't mean "us".

 

[W2R]

But it's so easy to blame "them", whoever "them" is...

Problem is, "them" is "us". No, I don't mean "us".

What? You're not a CEO of a top financial firm with a multi-billion dollar parachute and severance package?

I'm so disillusioned.

(As for me, I'm Warren Buffet and don't need a parachute or severance package. You can be anyone you want to be, online.)

 

[socca]

(cross-posted from the poll thread...)

From the Post:

washingtonpost.com

Firms participating in the bailout would be required to grant the government warrants to obtain nonvoting shares of stock, so taxpayers can benefit if the companies return to profitability.

I wonder how this relates to the outright purchase of the toxic waste on these companies' balance sheets.

Meanwhile, House Republicans won a major victory, persuading negotiators to include a provision that would require the Treasury Department to create a federal insurance program that would guarantee banks and other firms against loss from any troubled asset, the official said.

OK, now I'm confused. You realize a loss when you sell a security for less than you bought it for. Until you sell it, your loss is only hypothetical. Does this mean that companies that participate in the reverse auction and sell their securities at a loss to the gov't can be made whole again?

"Many of these assets still have significant underlying value, because the vast majority of people will eventually pay off their mortgages," President Bush said yesterday in his weekly radio address. "In other words, many of the assets the government would buy are likely to go up in price over time. This means that the government will be able to recoup much, if not all, of the original expenditure."

If this were true, there'd be an existing market for these securities.

Of the $700 billion figure, House Majority Leader Steny Hoyer (D-Md.) said: "Nobody believes that's going to be the final cost."

Ahhh...a little honesty. A refreshing change!

 

[HFWR]

What? You're not a CEO of a top financial firm with a multi-billion dollar parachute and severance package?

Not even close...

 

[W2R]

Not even close...

Me either, but ssssh, don't tell anybody. They'll never figure it out.

 

[TromboneAl]

As time goes by, we hear more and more scary talk about the state of the economy. For example, Buffett saying "...biggest financial meltdown in American history." Which I take to mean: "worse than the great depression."

So I'm wondering if people are going to say "Is it really possible that the "government who can't shoot straight" is going to be able to solve this just by writing a check? I think I'll take my money out of the bank."

IOW, this delay of just a few days could undermine the effectiveness of the bailout.

Interesting times, huh?

 

[W2R]

As time goes by, we hear more and more scary talk about the state of the economy. For example, Buffett saying "...biggest financial meltdown in American history." Which I take to mean: "worse than the great depression."

So I'm wondering if people are going to say "Is it really possible that the "government who can't shoot straight" is going to be able to solve this just by writing a check? I think I'll take my money out of the bank."

IOW, this delay of just a few days could undermine the effectiveness of the bailout.

Interesting times, huh?

If the bail-out is going to be subject to zero oversight, as has been proposed, then the government can rescue all the banks it wants. You're right, though, because there are so many related and interwoven consequences.

It seems to me that eventually this could lead to staggering levels of inflation, but let's just be ostriches and hide our heads in the sand.

 

[Retire Soon]

Summary of Draft Proposal

Here is a Summary of the tentative Proposal of the taxpayer Bail-Out:

Summary of the Draft Proposal To Rescue U.S. Financial Markets - WSJ.com

 

[W2R]

Here is a Summary of the tentative Proposal of the taxpayer Bail-Out:

Summary of the Draft Proposal To Rescue U.S. Financial Markets - WSJ.com

Since I don't subscribe to the WSJ (or anything else online with paid subscription) I couldn't read the article. However, I could read the following comment by someone who did:

This is outrageous! At the very end it is thrown in that he gov't will be able to reduce interest and principal of people that took loans they had no business raking. So know I have to pay for their mistake! I acted responsibly and didn't over extend myself but know I pay!

If what he said is true, then I am outraged as well.

 

[Nords]

As time goes by, we hear more and more scary talk about the state of the economy. For example, Buffett saying "...biggest financial meltdown in American history." Which I take to mean: "worse than the great depression."

I think it's the biggest in terms of $$, such as they are today, but I'd like to see an analysis based on inflation-adjusted amounts or % of GDP. I suspect that what we're seeing now is is a tiny blip next to the S&L crisis or the Depression or the banking crises of 1907.

 

[W2R]

I think it's the biggest in terms of $$, such as they are today, but I'd like to see an analysis based on inflation-adjusted amounts or % of GDP. I suspect that what we're seeing now is is a tiny blip next to the S&L crisis or the Depression or the banking crises of 1907.

I think you are right.

Politicians who will be up for re-election shortly must be persuaded to back the plan, if it is to be adopted. They are concerned because the American public is not "sold" on it, yet. So, they are reluctant to back this bailout plan and are concerned about losing votes.

Consequently, it is to the best interest of Paulson, Bernancke, and others such as Buffet who back the plan to scare the public a little so politicians will come on board and the plan will be passed.

 

[cute fuzzy bunny]

Since I don't subscribe to the WSJ (or anything else online with paid subscription) I couldn't read the article.

Little known workaround. WSJ.com allows google news to crawl their site, and carries whole articles.

So if you go to a stub article like the one above that asks for a username and password, simply highlight and copy the headline, go to google, pick news, and paste the headline in. Voila...whole article for free.

http://online.wsj.com/article/SB122257682963083173.html?mod=googlenews_wsj

 

[Retire Soon]

Since I don't subscribe to the WSJ (or anything else online with paid subscription) I couldn't read the article. However, I could read the following comment by someone who did:



If what he said is true, then I am outraged as well.

Here is part of the summary from WSJ:

Office of Speaker Nancy Pelosi -- Sept. 28, 2008
REINVEST, REIMBURSE, REFORM
IMPROVING THE FINANCIAL RESCUE LEGISLATION
Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets -- including cutting in half the Administration's initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers' funds. If the government loses money, the financial industry will pay back the taxpayers.

3 Phases of a Financial Rescue with Strong Taxpayer Protections

• Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street
• Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets
• Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes

CRITICAL IMPROVEMENTS TO THE RESCUE PLAN
Democrats have insisted from day one on substantial changes to make the Bush-Paulson plan acceptable
Office of Speaker Nancy Pelosi -- Sept. 28, 2008
REINVEST, REIMBURSE, REFORM
IMPROVING THE FINANCIAL RESCUE LEGISLATION
Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets -- including cutting in half the Administration's initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers' funds. If the government loses money, the financial industry will pay back the taxpayers.

3 Phases of a Financial Rescue with Strong Taxpayer Protections

• Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street
• Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets
• Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes

 

[samclem]

I think it's the biggest in terms of $$, such as they are today, but I'd like to see an analysis based on inflation-adjusted amounts or % of GDP. I suspect that what we're seeing now is is a tiny blip next to the S&L crisis or the Depression or the banking crises of 1907.

This $700B is quite a lot by any historical measure. The snippet below is from "America Needs a New New Deal" from the WSJ.

The size and scale of the Bush administration's proposal are mind-boggling. During the New Deal, the Roosevelt administration spent about $250 billion (in today's dollars) on public-works projects, building about 8,000 parks, 40,000 public buildings, 72,000 schools and 80,000 bridges. The entire cost of all the New Deal programs (in today's dollars) was about $500 billion. The secretary of the Treasury now wants to spend perhaps twice that amount, simply to prevent a financial collapse.

The inflation adjustment seems a little off. I think if you used a conversion rate based on wage increases rather than consumer inflation, you'd get a closer comparison of the bailout to the New Deal. (Wage growth seems a more applicable metric, since a lot of the govt expenditures were for pay to perform the public works projects.)

Still, at least in absolute inflation-adjusted dollars, the size of the two programs is comparable. I can't believe there's not a more productive use for $700 billion in taxpayer money when you look at what we got for our nickel last time.

 

[cute fuzzy bunny]

I think there also wasnt a minimum wage back then, and there were lots of unemployed people willing to do fairly expensive work (by todays standards) for next to nothing just to get a paycheck.

 

[socca]

Full article: Draft Proposal on Financial Rescue Legislation - washingtonpost.com

I don't subscribe to the Post, but I'm still able to read the article.

Interesting intellectual exercise: let's say that it's my money that is entirely funding the bailout (oh, sorry, financial rescue plan). What risk should I assign to this 'investment'? Reading Pelosi's article, she's implying that I should consider this a very low risk investment with the additional provisions added to the original Paulson proposal.

However, as a cautious and skeptical investor, I need to differentiate between pro-bailout marketing hype and reality. I can probably find a set of assumptions regarding how the future is going to unfold in which the new bailout proposal does indeed represent low risk to my investment. What is troubling is that there may be an entirely different set of completely reasonable assumptions that lead to disaster. What are these alternative assumptions?

Let's not forget how the 2003 Iraq invasion was marketed to the American people: low risk, high reward, short time-frame. Within 3 days after the Iraq invasion, American commanders on the ground were reporting that the fundamental assumptions supporting the pre-war invasion risk estimate were wrong. Oops! Well, no problem, it's just going to be a long, hard, slog.