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29 September 2008

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PS

As long as they draw the line on hedge funds, I am inclined to support. A complete collapse of the banking system would not just hurt a bunch of fat-cat investors but almost every facet of the economy. Sure, everyone is insured for $100k by the FDIC, but they're scraping the bottom of the barrel, meaning they would come looking to the US taxpayers to essentially cough up money to replenish their own bank accounts. Would having 100+ banks under FDIC supervision be any less of an intervention in the free market?

Duncan Kinder

Is TARP a step on the path that leads to a planned

In order to "plan" something, you must know what you are doing, which the government obviously does not know at present.

QED: Whatever this may mean, a planned economy it shall not be.

jamzo

while the idea that there is "no free lunch" is widely accepted, the idea that there is "no free market" is strongly

disputed despite evidence to the contrary

we have a planned economy -
it may not be planned in the style of communist dictatorships but it is the product of debate, planning and legislation

the telecommunications monopolies are the rproduct of legislation, the patent system driving the pharmaceutical industry is a product of legislation, the health care industry is the product of legislation, the auto insurance industry is the product of legislation, the energy industries are the product of legislation

the financial industries are a product of legislation

as we grit our teeth and complain about the "bush -paulson" bail out plan, the government acts to strengthens the market positions of stronger financial entities with inexpensive deals

darwin would not call this an evolutionary process but the most fit are going to survive and the least fit are going to cease to exist

http://www.nytimes.com/2008/09/30/business/30bank.html?_r=1&hp&oref=slogin

Citigroup Buys Banking Operations of Wachovia
Published: September 29, 2008

Citigroup will acquire the banking operations of the Wachovia Corporation, the Federal Deposit Insurance Corporation said Monday morning, the latest bank to fall victim to the distressed mortgage market.
Citigroup will pay $1 a share, or about $2.2 billion, according to people briefed on the deal.
The F.D.I.C. said that the agency would absorb losses from Wachovia above $42 billion and that it would receive $12 billion in preferred stock and warrants from Citigroup in return for assuming that risk.
“Wachovia did not fail,” the F.D.I.C. said, “rather it is to be acquired by Citigroup Inc. on an open-bank basis with assistance from the F.D.I.C.”
Under the deal, Citigroup will acquire most of Wachovia’s assets and liabilities, including $400 billion in deposits and will assume senior and subordinated debt of Wachovia, the F.D.I.C. said. Wachovia Corporation will continue to own the retail brokerage firm AG Edwards and the money management arm Evergreen.
The sale would further concentrate Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Citigroup. Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors.
Wachovia has been hurt badly by its 2006 purchase of Golden West Financial, a California lender specializing in so-called pay-option mortgages. The bank also faced mounting losses on loans made to home builders and commercial real estate developers, and its acquisition of A. G. Edwards, a retail brokerage firm, turned out to be problematic. In June, Wachovia’s board ousted G. Kennedy Thompson, the bank’s longtime chief executive.
As the credit crisis has deepened, a consolidation in the financial industry that analysts have predicted for years seems to be playing out in a matter of weeks.
The impact will be felt on Main Street, Wall Street and in Washington. While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts. Some small and midsize banks may be unable to compete with these behemoths.
Both Citigroup and Wells Fargo were deeply concerned about absorbing Wachovia’s giant loan portfolio, which is littered with bad mortgages, these people said. Bankers had little time to assess the risk.
Citigroup executives considered Wachovia a make-or-break deal for their consumer banking ambitions. With Wachovia, Citigroup would gain one of the pre-eminent retail bank operations after struggling to build one for years. It will also give Citigroup access to more stable customer deposits, allowing it to rely less heavily on outside investors for funds.


JohnS

Don't know much about history, la la la la...From the NY Times:

"The rescue package, if successful, would make the recognition of losses and the inevitable winnowing of the banking system more an orderly retreat than a collapse. Yet that pruning of the banking industry must take place, economists say, and it is the government’s role to move it along instead of coddling the banks if the financial system is going to return to health.

Japan’s experience in the 1990s is a cautionary example of the peril of propping up banks after a real estate boom ends. The Japanese government helped keep many troubled banks afloat, hoping to avoid the pain of bank failures, only to extend the economic downturn as consumer spending and job growth fell.

The Japanese slump continued for many years, ending only a few years ago, a stretch of economic stagnation known as Japan’s lost decade.

“The lesson from Japan is that tough love for the banks is what’s needed,” said Kenneth Rogoff, an economist at Harvard. “In the current crisis, you do want to get rid of the bad assets from the banks, to get markets working again. But the key is going to be in the details of how the bailout works. You don’t want it to be a subsidy in disguise that keeps insolvent banks alive. That would just prolong the economic pain.”

Nancy K

I have no doubt that true capitalism works, but what we seem to have is rampant greed, from the CEO's on wall street to the average American who wants a life style they can not and maybe never will be able to afford. As the Eagle's song says "I want it all and I want it now.". That has been our mantra and now it is crashing down around us.
I admire Warren Buffet's financial savy and he seems to feel the bail out is needed. Maybe he is just trying to protect his billions who knows. I know I don't. This too shall pass, but maybe not in our lifetime.

Cold War Zoomie

Is TARP a step on the path that leads to a planned economy?

I hope not (and my hope is driving my thinking!)

My understanding is that the vast majority of Americans HATE this bill. We won't tolerate slipping towards a more planned economy. (there's that hope again) Capitalism is in our blood.

What I do not understand is when regulating the markets crosses the line into planning the economy. We tend not to cover such issues in telecommunications engineering.

I always return to pre-Thatcher Britain as an example of a mixed economy leaning heavily on the planned side...when the British government owned so many of the heavy industries. Have we *ever* gone that far left? No. And I cannot imagine we ever would without some serious social upheaval.

Dems in Congress are scared of being accused of fiddling while Rome burns if, and when, the economy goes Tango Uniform and people lose their shirts in the stock market. Fear is such a great motivator.

Fear works on me, too. I am not convinced that an intervention is *not* the best solution to save the patient. Although there are more and more doubts being voiced by economists that the consequences are as dire as Paulson et al are saying.

lina

This is a good time to reflect upon the Hoover administration:

"Hoover rejected the Coolidge-Mellon imperative to keep the federal government out of active participation in the economy — a plan that worked well during prosperous times, but not during a major depression. Hoover first stressed voluntary action by business and labor to keep the economy functioning, but the continuing deterioration of conditions forced a change. Hoover allowed the government to become the source of funding for construction and relief programs, but he rationalized this departure by developing self-liquidating programs and having state and local authorities administer them.

Finally, at the end of his administration, the formerly confident Hoover was a beaten man. He had been overwhelmingly defeated at the polls, unemployment continued to soar and the nation was stilled by a major bank crisis. As he waited for Franklin Roosevelt to take office, Hoover was tired, bitter and out of ideas."

http://www.u-s-history.com/pages/h1445.html

The Congress will enact the Paulson bill because it is afraid of doing nothing. If it does nothing until it gets the input of 100 (or 1000) leading economists on what to do, we're headed for Hooverville.

This bill is a "bridge loan" until Jan. 20. Let the new government rework the plan at that time. Trying to get this current group )lame duckers and people running for reelection) to come up with an intelligent fix is simply not in the cards.


Nancy K

I feel I need to address another issue regarding the mortgage melt down. I have heard it implied that giving loans to illegal aliens in some part caused the meltdown. As a public health nurse, I work with the poor, legal and illegal. I have seen several families living in one house, I have seen several family members living in 1 room, I have never seen a family that was undocumented living in a home they have bought.
I am not saying this does not happen, I'm just saying there where I live in S. Calif, which has a very high latino population, I have not seen this.
I think what is happening is that anyone with a latino last name is being referred to by the right as illegal and that is just wrong. California has a large latino population that have been in California longer than most caucasians. They have fought in our wars in a higher percentage than caucasians.
I just believe that some on the right in their rush to vilify and cast blame, are doing a great disservice to a large group of people. They would do well to remember these people can vote.

Patrick Lang

All

Someone said something about Buffet favoring the TARP.

He should. He now owns five billion dollars of Goldman Sachs' debt. pl

zanzibar

Good on you, Pat!

TARP is worse than Wall Street Welfare. Its a cesspool of corruption that rewards cronyism. It continues the now well established DC politician practice of treating US citizens as idiots while destroying our economic and legal framework.

I just want to bring to attention a few points.

First, look at the deep conflict of interest. Hank Paulson was CEO of Goldman Sachs from 1998 to 2006. On his watch GS was at the epicenter of the credit bubble. He personally profited from all the sham accounting that generated phony profits. Having being instrumental in imploding many a bank along with his other buddies on Wall Street he now gets to divvy up hundreds of billions of dollars of middle class taxpayer's money to his cronies. This is unethical, immoral and just plain wrong. Neither he nor politicians like Barney Frank, Chris Dodd and Nancy Pelosi think anything's wrong with this picture - when they have received hundreds of thousands of calls and letters from their constituents opposing this welfare for the wealthy.

Second, look how they treat us. They are crowing that they have put limits on executive compensation. That's pure nonsense since they have done nothing of that sort. In fact the proposed legislation makes it explicit that existing compensation agreements including golden parachutes remain.

Third, the Treasury holds a conference call for Wall Street and not the public - making no pretense that they are an arm of Wall Street. They inform that the notion of tranches is just smoke and mirrors as they can draw down any amount they require. Although they are vague about pricing they insinuate that banks will not have to reprice downwards any of the securities which they would have to if they were sold to private parties.

Fourth, they argue that the the banks are too big to fail yet they allow them to get even bigger with all these sham "mergers" with the taxpayer guaranteeing all the losses on the illiquid securities.

Folks, this is Theft! Robbing the poor to pay the rich. But worse they treat us with utter contempt with this sham of a bill.

Oracle

Like so many I do not trust Paulson. But what are all of us non-economists to do when the economists are so divided on the question of how quickly action has to be taken to increase liquidity? In the last week a terrible proposal for a finance czar was beaten back. That is a positive development. The current bill--if it passes--is probably the best that can be achieved in this Congress. It still does not address a host of serious economic problems. And it does not mean that in the future Congress will deal effectively with those problems, e.g., all forms of futures trading, including derivatives, that are NOT needed to raise investment capital but are desired by banks because futures instruments allow banks to make MORE MONEY. This crucial point has not been made by Barney Frank and Chris Dodd. (Dodd gets too much money from Wall Street to be totally trustworthy.) The show is still in the first act.

g. powell

I'm tired of hearing this free market and trust capitalism rhetoric, it offers no solution to the problem. Capitalism as we have known it since the Reagan Revolution is dead. It is not coming back.

In Japan, they ignored their problems for a long time, but eventually they injected public funds into their banks. And it worked. Japanese banks are now profitable and buying bits of the U.S. financial system.

We will nationalize the financial system temporarily. It is inevitable. Taxpayer money should buy equity in these firms to be sold for a profit when they are healthy again. There should also be a tax surcharge on the wealthy to help pay for this.

Capitalism depends on a functioning financial system by definition. Unregulated use of derivative contracts has created a web on interdependent institutions which is now crashing down, taking healthy players down with it.

Capitalism cannot thrive without a strong public sector. I cannot think of a single place where it does. We have lost sight of that in this country, and we are now relearning a lesson that we once taught the world.

Paul

Given the range of informed opinion about “TARP”, it is difficult to determine whether the government’s action was necessary or even appropriate.

Mr. Calhoun speaks of failure of this bank or that financial institution, but he does not mention fraud as an element of the breakdown. Things will “fail” when they are no longer relevant, but they will also “fail” when the system is rigged. IMHO fraud is widespread on Wall Street. We are also learning how secretive the financial system became. That AIG did not set aside reserves for the transactions they were underwriting, is that a “failure” or is it “fraud”?

Unfortunately, little in this country get the benefit of sunshine; the government and corporations keep us in the dark; the game has been played without referees for too long.

So far, the government’s action has been limited to political intervention. Hopefully, prosecutors will work alongside real accountants (I will no longer call those keyboard jockeys “financial officers”) to gather evidence thus bringing the thieves to justice.

Keep in mind that a less-than-open free market brought us this mess; there should be reservation and suspicion about that market’s ability to right the ship without intervention. Until sensible and reasonable regulation and disclosure is introduced into the financial models, secrecy (and fraud) will be repeated again and again. Punishment for white collar-crime should be swift and severe.


Fred

We've got to get this done now; we can't wait for the evidence to be a financial 'mushroom cloud'!
Sounds like another manufactured crisis; of course having nothing to do with 30 years of de-regulation thanks to the neo-con economic movement. No worries Main Street America, Wall Street Welfare is much more important than your welfare. Early child care education? Sorry, got to pay off that debt. National Health Care? Sorry, look at the national debt!. Tax cuts? Why yes, that stimulates the economy. We can't have some Democratic White House actually paying down the national debt (Clinton), what would happen to the stock market?

As was said earlier, there is no 'free lunch'. No, not at all; just dinner and desert topped of with a nice glass scotch and a Cohiba.

Graywolf

Elect Obama and a Democrat-controlled Congress and you'll see a lot more big government economic intervention.
Anyone who thinks that Democrats (dominated by unions, public employees and socialist university faculties) are capitalists is lying to themselves

John Shklov
Calhoun is right. The markets will sort this mess out if given a chance to do so.
Surely you jest? At what cost and who will bear the expense?

It would be wonderful if the world were that simple. It is just as easy to be a "true believer" in capitalism as socialism it seems.

Tom Milton

Am I wrong in my judgement that banks nation-wide are withholding credit from quality customers in order to stampede this process?

Looks like a game of chicken from here. Standby for more heavy rolls as their grip is slipping and they need to regain control.

frank durkee

Here in the back end of Colorado for a time last week it was veery difficult to get any type of loan from the local banks by almost any customer. this is a liquidity crisis and if the loans stop much of both the mainstreet economy as well as the macro economy will stop. There are no good alternatives just bad and less bad.
We haven't had from the 19th Century a 'free market'. We have a regulated market operating under a bewildering variety of laws. It has crashed not primarily due to failures of capitalism, or grovernment intrusion, but from capitalistic excesses in any one who's house appreciated over long term trends participated. To quote Pogo we have met the enemy and it is us'.

Jose

Oracle, I too do not trust Paulson because Lehman goes down via the free market but not AIG?

Why?

http://groups.google.com/group/misc.invest.stocks/browse_thread/thread/7bac85e340202809?pli=1

Conflict of interest for the Secretary?

VietnamVet

Colonel,

You are correct the bailout is welfare for Wall Street; except the Wall Street Investment Banks are gone. TARP is a loan in the hope that you can keep using your credit cards until the next President decides how to handle the financial crisis.

What corporate broadcast media has not been discussing is the cause of the crisis; credit swaps. They were called "insurance" but are really bets made without collateral that the secularized mortgage securities would forever increase in value. NYT Times puts the total value of the credit swaps at 61 trillion dollars. More value than all the money in the world.

The weekend Washington Post had an article on a Prince Williams County VA townhouse that the bubble inflated in value to over $250,000. The owner lost it when she could not pay $230,000 Countrywide ARM. Freddie Mac is now trying to sell it for around $70,000. No buyers yet. The security that has this mortgage has just lost at least $160,000 in value not to mention any collateral "insurance" or loans on the books involved in creating and the leveraged flipping of the security.

Simply put all the money in the world has to be wiped off the books of the financial institutions. If John McCain is elected you are pretty much guaranteed a depression. Herbert Hoover is brilliant compared to Phil Graham, the champion of financial deregulation; McCain/Palin's future Treasury Secretary. If Barrack Obama is elected, he will have to be smart and lucky in choosing from the following options to avoid a depression:

1) The financial system reboots after a Bank Holiday with the leveraged debt written off of the books,

2) The financial system is merged into JPMorgan Chase and Wells Fargo with all the leveraged debt written off of the books, or

3) US government nationalizes the financial system, creates the New Dollar and writes off all debt and charters hundreds of new banks.

zanzibar

This NY Times article on the AIG Bailout dramatically illustrates Hank Paulson's conflict of interest.

With only around $45 billion of capital if Goldman Sachs had to take a $20 billion loss on AIG related positions it could have sent GS stock into a tailspin and would have likely impacted Paulson's own net worth.

These are not arms length transactions. IMO, the first step to increase confidence in the financial system is to have complete transparency. I also believe that Paulson, Bernanke, Cox and Lockhart should be forced to resign. It makes no sense to have these guys who have proven to be continuously wrong in their judgments managing the aftermath of the credit bubble.

john in the boro

“The continuing survival of classical [economic] theory can be understood only when it is seen that classical beliefs protect business autonomy and its income and serve to obscure the economic power exercised as a matter of course by the modern enterprise by declaring that all power rests, in fact, with the market” (John Kenneth Galbraith).

The American public largely buys the Adam Smith narrative as retold over the past 30 years. Government intervention in the market is wrong. Often, the non-intervention principle works to the advantage of big business especially under a lax administration (there's a hidden hand if ever there was one). However, some of the players forget themselves and stray from dogma when dogma proves disadvantageous and then they demand intervention or, more correctly, lots of money to cover their losses. The ones who remain faithful to the free market myth eat their lunches. Even a rigged table has rules.

par4

Nationalize everything and hang the plutocrats

jedermann

Putting aside for a moment our huge and justifiable rage at the unfairness of having already seen our little bit of paradise redistributed to the richest five percent of the population and now being sent the bill for cleaning up the toxic mess those same people have left behind, what, in even the broadest of strokes do those objecting so vehemently to the bailout plan suggest as an alternative? Do you simply believe that we can wait out the credit freeze? Can farmers who are absolutely dependent upon yearly loans and small businesses that can only maintain inventory and workforce by the use of short-term credit survive until the banks are willing and able to lend? Do you believe that the justice of making the Masters of the Universe suffer will justify the suffering of those at the bottom of the food chain? Do you believe that we will be returned to a simpler, purer capitalism by letting the current, rigged market define the outcome? Does society have a legitimate interest in shaping that outcome or must we stand by and allow the terrible machine of the markets to chew up everyone and everything that it will until some state of equilibrium has been reached? I am perfectly willing to be convinced that there is a better way, but I have yet to hear even the slightest notion of anything viable. The House Republican plan was a joke that envisioned the banking industry funding an insurance plan with capital it does not have and giving the same miscreants who concocted the schemes that got us into this a capital gains tax cut. Do you have something in mind that could actually be enacted that would be better?

Really, let’s hear it.

Patrick Lang

graywolf

I can't abide McCain. I served under too many like him.

I reluctantly endorse Obama for lack of someone better.

If there was ever a time for the creation of a real 3rd party this is it.

Hagel in 2012? pl

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