Stripped of the "Bells and Whistles," the "Christmas Tree Ornaments," and other distractors, the basic bailout remains an arrangement in which the government of the US would:
- Buy bundles of securitized mortgage paper of various kinds from those willing to sell them. These bundles would be bought for prices greater than their current value (why else would they be sold?) but less than they cost the sellers. (Again, why else....)
- The government will hold the paper until some of it evaluates to a level at which commercial buyers on a preferred list (not just anyone! You there! Forget it!) will be established. The government will then sell the evaluated paper for less than it is then worth. The rest of the paper? (the worthless part) Who knows? I would bet that the government (you and me) eats that part.
- The buyers of the "good" paper will then seek to enforce the terms of the loans. Why else would they have bought it?
What a good deal for the taxpayer.
We are told that this crisis is about "main street" and not "Wall Street" and that it is about credit shrinkage, not the value of companies like Goldman Sachs where Paulson still has a lot of his money in a "blind" trust. Financial media anchors plead desperately for proletarian plebeian understanding of the immediacy of the threat to every day life. On one CNBC today, the winsome anchor trembled at the story of a woman in California who runs and owns an olive products business. Her enterprise has been a success over the last years and she wants to expand through increased staffing and marketing. Sadly, she went to the local banks and was turned down for a quarter million dollar loan. This is a sad thing. Sigh. Sigh. At the very end of the story the network felt obliged to add that after this story had been run earlier in the day, the olive merchant had received many calls from private investors and a couple of banks offering to loan her the money. Anecdotal? Yes, but much of what is being said about the end of credit operations is worse than anecdotal. It is mere rumor mongering and scare tactics.
The "Bells and Whistles" in the "rescue plan" are such nifty things as increased FDIC insurance limits, and an improvement of the AMT situation. It is quite openly admitted that the "sweeteners" are just that. They are designed to provide cover for members of the House in order to enable them to face voters in their constituencies. The citizenry seems to be widely hostile to the basic deal that I outlined. The citizenry is referred to with thinly concealed contempt by the financial media, most politicians and a lot of bloggers. Well, the financial media speak for traders, not taxpayers. Their reverential attitude toward people like Buffet is revealing. Buffet is the proud owner of five billion dollars (newly purchased) of Goldman Sachs debt. He said today that if the bailout is not passed he will have made a very bad bet. We should take his advice about this?
The framers of the the Constitution deliberately created a system in which the House of Representatives is elected every two years and represents constituencies of a size that make members more vulnerable to the citizenry than the senate. The Constitution also requires that all revenue bills originate in the House.
To overcome that "difficulty" Senator Dodd and friends have arranged to vote on a cleverly shaped non-revenue bill filled with "meatiness." The purpose of this exercise is clearly to chivvy the House along into compliance with the received wisdom of the elites (and the moneyed).
If we accept the claim that the credit markets are in severe danger, then we citizens should demand a better deal for accepting a role. Equity in the companies we are going to save is one possibility. Alternatively, Paul O'Neill has recommended a federal guarantee for the value of the presently rotten paper so that it will trade like money. That would be another way out that would not put taxpayers directly at risk. The alternatives that do not depend on taxpayer exploitation have not been developed.
Citizen voters should remember what happens in the next few days. pl
