The "Deal" is not good enough yet...

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

Comments

[Serving Patriot]

COL,

Thanks for your words. Two quick thoughts.

First, one cannot help but wonder if there is some "manipulation" underway in the credit market; manipulation meant to apply pressure to exactly the kind of woman profiled in the news. Manipulation that threatens the day-to-day operation of the generic, non-finance industry businessman, farmer and (presumably) credit worthy consumer just out to buy that new car. The kind of manipulation one would expect from a neighborhood under an organized crime protection racket. It sure seems that way as all of a sudden, no bank or other credit extending agency is willing to lend their money to low-risk creditworthy individuals and businesses. Yet, the People are expected to sign on to what amounts to a $700,000,000,000.00 line of credit for the very same misers?

Second, I thought the Constitution said all appropriations must start in the House of Representatives? At least that is what it says here: Article 1, Section 7

Third, sad to see the voters treated with such contempt and derision by their elected officials. I consider the 228 brave ones from Monday to at least be doing what their constituents demanded (by a WIDE margin). Sad and gutless to see the higher house now offer "sweeteners" including revenue cuts (tax breaks) to pull forth reactionary GOP congressmen when they could, as easily, add sweeteners (direct mortgage assistance, revenue additions by taxing $1M+ incomes, equity stakes in bailed out firms) to entice progressive democratic congressman to switch sides. (

What can one expect from today's gerrymandered and incumbent filled Congress? Seems that there is actually a dual racket underway - incumbency protection and financial services protection. Too bad that these gangsters are going to meet a nation full of Eliott Ness' in about 5 weeks.

SP

[Maureen Lang]

Paul O'Neill's idea makes too much sense to be considered right now. The PTB, both Dems & Repubs, have other fish to fry.

Where would we be at in all of this if O'Neill had been allowed to continue as Treasury Secretary, I wonder. He was thrown aside in the manner we've come to expect during the current Fed Admin's quest for absolute loyalty over even basic competence. What a sorry 7 1/2 years this has been economically- a runaway, careening train followed by a train wreck that might have been prevented if someone truly capable had been kept in the engineer's seat.

[Tom Fitz]

Amen, Col.

I was undecided before the House vote, but since then I've had a chance to read the modified Paulson proposal and now agree with the majority who voted NO. The bill before the Senate has grown from a pig to a warthog, and even a bucket of lipstick isn't going to make it acceptable. Go back to the drawling board; start with DeFazio's proposal, Soros' proposal, or a blank sheet of paper. The Paulson proposal even with the little window dressing added in the House bill is A) too much money given to the wrong people with no oversight, and B) doesn't actually deal with the problem.

I am NOT looking for a perfect solution to the crisis (when has there ever been a perfect solution to a crisis??), but it seems to me we need something that is just big enough to buy time without fiscally tying the hands of President Obama. So, I want to see a smaller dollar amount, I want it used only to directly recapitalize companies by taking an equity position, and if we don't have the votes for any systemic reforms right now, leave it at that (ok, higher FDIC coverage too).

[bstr]

Dear Sir. You propose new rules for those who write you such as "Insults are not allowed.

- ad hominem attacks are not allowed.

- Gross language is not allowed unless present in quotation or used in such a way as to not violate other SST policy.

And then propose we discuss Congress? Nigh impossible.

[Jose]

Col, the rush to pass this bill in troubling.

There was no consideration for alternatives plus the same clowns that got us into this mess are suppose to save us.

Madness.

To Paul O'Neil's plan check these alternatives:

http://www.dailykos.com/storyonly/2008/10/1/10501/3273/85/616219

http://www.economicpopulist.org/?q=content/alternative-bail-out-plans

This is a big mistake because if you think it will stop at $700 billion, you must still be looking for Saddam's WMD's.

[Jim Borland]

Sen. Jim Webb disappointingly voted for the bailout. In an earlier letter to Senator Dodd he suggested later action to tighten regulation of the financial system. We'll wait a long time for that; pity that in the 400+ pages of the bill Webb couldn't have made a start.

[DanaJ]

I think the saddest, most pathetic moment was when Paulson (or was it Bernake?) got down on his knees to beg Pelosi's backing.

We are being had, in a big way. But the Congress will probably approve this "thing" that stinks to high heaven.
Can't one see by now that all the screaming and shouting are a distraction? Sure, the markets are down, but they haven't fallen thru the floor into the basement, and I don't think they will.
We the tax payers are being asked to foot the bill to cover Wall Streets bad 'bets' in a way that will hog-tie any future spending discretion by an Obama or McCain administration.
My god, the debt that has been run up by the Bush administration will bankrupt this country.
Has anybody ever thought through the consequences of that? If McCain is (s)elected he has stated quite clearly that he will only budget for defense and not much else, every thing other than that will be cut or eliminated, or "de-funded" as Reagan liked to do.
What will be left of this once great country?
Thank god my parents have passed on, they would be horrified and disgusted by all of this, a country run by Banksters.

[Curious]

With the way things are going the banking crisis now has spill over to other sector and regions of the world.

1. Europe is now about to enter massive credit crunch. And they have sizeable corporations that will be in trouble.

2. Car industry is crashing. 20-30% sale reduction. This is going to hurt massively. (tho' to be honest GM, ford, and chrysler all deserve this because of their highly mismanaged product line)

4. consumer spending grinds (people's credit card is tapped out) This mean this holiday season will be very bad.

5. stock market will continue drifted downward. (Won't go back up until economy is healthy and people have money again)

6. housing price will keep going down for next 6-10 months.

Now the ugly part:

7. China slow down. They are not that sophisticated. They will retract instead of start spending internally.

8 the rest of asia then also cooling. That means no part of world is growing.

Big question: middle east, Pakistan. What will happen there as credit crunch hit those area.

[m savoca]

congressman Brad Sherman from California 27th (not my district) made one of the most well reasoned arguments against the bailout i have heard yet, when he appeared on CNBC , as a guest of Kudlow

his arguments revolved around the lack of meaningful oversight, and section 112 of the bill which provided for using US taxpayer money to bail out foreign investors and foreign investment!!

Jay Inslee of Washington State also had well reasoned arguments against as did many others...true servants of the people...indicating the bailout was the wrong medicine and congress was being stampeded into a hysterical response.

but alas the pigmen of wall street have many more lobbyists and make larger campaign donations then "we the people.." so apparently greed will win out.

i am disgusted

by the way, prediction, 700 billion is just a first installment...and none of this will staunch the flow of blood. we are in very dire straights.

isn't it interesting, the PROBLEM was too much bad credit and loan defaults...so the solution?...another "white line" of credit drawn out on the mirror for the "credit drug addict" economy.

like many others i spent several days with phone, fax and computer doing my own lobbying.

guess we are going to give it one more try before Friday's vote in the house... and then there is "payback" in November if the people will remember.

[Tom Milton]

They vote against my financial interests and I will vote against theirs.

A plain and simple exchange.

Thank you for this great forum.

BTW SP you are spot on.

[James R. Bradford]

This morning I heard members of the professional punditry as well as politicians deriding the members of Congress who opposed this bill out of fear of being defeated in the coming election.

Aren't they supposed to be afraid of that? Isn't that an underlying necessity in a functioning democracy? Are we now past paying lip service?

[Cold War Zoomie]

This was on NPR yesterday afternoon about small banks that have continued business the old-fashioned way:

Amid Financial Turmoil, Small Banks Thrive

How many of these banks exist and will they keep us afloat during the meltdown?

I hope there are a lot more people like Leon Moore out there.

[Patrick Lang]

CWZ

If you want a bank like that try Burke & Herbert Bank and Trust Co., Inc. in Alexandria, Virginia.

I am a stockholder. pl

[DanaJ]

Anyone want to bet Georgie attached a signing statement giving him the 'power of the purse' so he can just authorize another 700B by executive order? The last remaining power of Congress has been given up to the Imperial Presidency. They might as well just stay home for good after this next recess.
Really, we need to keep a sharp eye out on any statement attached to this thing after it passes.

[Tom Milton]

Crawler on Bloomberg TV this AM states:

"LIBOR rises as banks hoard cash after Senate approval".

Cost stated on BBC today as at least $15,000 per US household.

Not to worry, the AMT kick-in was raised $1,500 or so.

[Andy]

CWZ,

I heard that too. There's been a lot of bank consolidation over the last couple of decades, ISTM there is something desirable about limiting the size of financial institutions so that they are not "too big to fail." IOW, fewer, bigger players presents more risk to the system than many smaller players.

[John Howley]

Warren Buffet is a member of the Washington Post's board of directors.

http://www.washpostco.com/company.htm

I believe he is also a major shareholder of same.

WaPo has printed at least three fevered editorials in favor of the bailout and not once has this conflict of interest been mentioned.

Perhaps it is not considered noteworthy because such conflicts of interest are now the norm in Washington, D.C.

[Dana Jones]

Pat, I'd like to add to my prior comment.

A lot of people do not clearly understand Presidential Signing statements. They think of them as a post-it note added as an after thought by Bush.
They most definitely are not. Under Gonzalez, they have become very carefully crafted legal documents, sometimes many pages long, drafted well before hand.
They are specifically written to enhance Presidential powers, and if possible to limit Congressional authority over the Executive branch.
They have been used to negate legislation that was supposed to place limits on the executive, not withstanding the clear intention of Congress.
I would be very interested in what kind of language is in the now 400+ page "bailout" bill, and even more interested in any signing statement that gets attached to it. No doubt in my mind that there will be some innocuous clause in the bill that will be amplified by a later statement that will give the Executive the 'Power of the Purse' in an "emergency" that is supposed to be solely invested in Congress.
We are in very dangerous territory here.
DanaJ

[lina]

I don't understand all the ink spent railing against this bill as though upon passage it will be written in stone. They've cobbled together this monstrosity in order to survive the next four months. After that, this law, like all laws, can be amended.

There is regime change on the horizon, therefore anything passed right now will have a very short shelf life. All this hysteria is baffling to me.

Obvously, Paulson, et. al., handled the public relations on this worse than anyone could have imagined. Then again, it's what we've come to expect from the Bush Administration.

[JohnS]

I'm on board with those economists who think thebest way to get us through the immediate credit crisis is by injecting capital into troubled banks and getting a direct equity stake in return, rather than by trying to inflate the value of toxic assets.

But that ain't gonna happen -- America doesn't nationalize banks. Ever ever ever! Because all the usual suspects will scream "Socialism," and that would mean the Democrats would have to pass and own that particular piece of Commie legislation all on their very-nervous own. So we're now stuck with the the re-reworked Paulson $700 billion Senate rescue bill and it will pass the House tomorrow and here's why.

This is the fix-it that's gonna get us through until next year when the real heavy financial lifting begins. We'd all better work very hard to make sure that an Obama Administration is in place...

[The Lounsbury]

You may not care for this, but your screed is profoundly wrong-headed and one of the worst examples of know-nothing economic populism.

Taking this: 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.: While I am not watching any American media, which tends I am sure to the hysteric, the sober Financial Times reports data, not anectdote (which is indeed meaningless):
http://www.ft.com/cms/s/0/e29576d2-901a-11dd-9890-0000779fd18c.html

The data tell us clearly the following:
(i) LIBOR has exploded to levels not seen since the 1970s roughly, and
(ii) Banks are hoarding cash, not lending across to each other (the volumes are not a "conspiracy" as one commentator speculates, a peculiar thought;
(iii) cash is being hoarded across the board.

That spells contraction, and if not corrected Deprression. This is not theory, nor "financial media" this is actual live developments. And LIBOR is a bedrock market rate. Much global lending facilities, for SMEs say for working capital lines balancing receipts and costs, are based off of a LIBOR derived rate. So if LIBOR is 3.1% for overnight, an open working credit line for a SME is often LIBOR plus 400-700 basis points, or 4-7% over LIBOR. LIBOR skyrocketing and cash buildup mean lending is going down, and the rates at which lending is occuring are up, so our SME for working capital instead of paying say 7, gets with with a wider spread and at a higher base, to pay 12, as an example.

The Great Depression was not set off by the Wall Street stock crash, it was set off by serial panics and bank runs subsequent, over the period of years. This arty does a nice job of summing up the American experience: http://www.nytimes.com/2008/10/01/business/economy/01leonhardt.html?em The commentary here, including the OP is square in the opening paras.

[David Habakkuk]

Whether or not the amended plan can get through the House will be clear by Friday. But as it patently won't clear up the mess, it may be worth thinking of what might follow.

Among the many reasons why Paulson's proposals are such a shambles is that they conflate two distinct if related problems. One is the fact that the banking system in the U.S. -- as in the U.K. and Europe -- is undercapitalised. And as undercapitalised banks contract their lending, even where no risk is involved, this could spell big trouble for Main Street as well as Wall Street. The other is that banks are not lending to each other, largely because nobody has much idea what many of these exotic financial instruments created by the 'rocket scientists' on the basis of the assumption that house prices could never fall are worth.

What Paulson and Bernanke planned was a kind of stealth recapitalisation by paying a great deal more for these instruments than anyone else would. Even apart from the obvious danger that taxpayers would be giving massive subsidies to the greedy incompetents who created the mess, the record of past financial crises shows clearly that public acquisition of dodgy assets is a very poor way of recapitalising banks.

Among other things, it tends to prevent banks which should do going to wall. And one of the things urgently needed both in the U.S. and the U.K. is a rapid contraction of a bloated financial sector. (We don't want to end up like Japan.)

A very shrewd lady called Yves Smith, who runs a blog called Naked Capitalism, pointed to an IMF study which demonstrated that direct recapitalisation of banks has been far more successful. She and others have pointed out that such recapitalisation has on occasion been done by private sector mechanisms -- such as debt-for-equity swaps. It has also been done by governments injecting money in return for various kinds of stake, or by temporary nationalisation, as was done very successfully by Sweden. In neither case do financial institutions get a free ride at taxpayers' expense.

(See http://www.nakedcapitalism.com/2008/09/new-imf-study-of-banking-crises.html.)

What makes the best sense for the U.S. needs to be thrashed out reasonably quickly. But even if it is possible to minimise the need for state finance, solutions are not going to arise spontaneously. Without active government involvement, they won't happen.

A further question is what it is sensible to do to relieve distress in the housing market. Foreclosures are commonly not only a disaster for those who lose their homes, but leave the mortgage lenders worse off than they would have been, if some kind of renegotiation had been possible. In a collapsing housing market, the properties may simply remain vacant and go to rack and ruin.

One of the few people to anticipate the scale of the current crisis, Professor Nouriel Roubini of New York University, has recalled how during the Depression the Home Owners' Loan Corporation was create to buy mortgages from bank at a discount price, reduce further the face value of such mortgages and refinance distressed homeowners into new mortgages with lower face value and lower fixed rate mortgage rates. He thinks something similar should be tried again.

Doubtless a new HOLC, like Swedish-style bank nationalisation, will seem too socialistic for many. But perhaps on this occasion one can usefully recall Deng Xiaoping's justification for his ditching of communist orthodoxies: 'It doesn't matter whether the cat is black or white, as long as it catches mice.'

[VietnamVet]

Colonel,

The bailout is kicking the can down the road. Hopefully throwing cash at the banks will lubricate the credit markets to keep the money flowing till after the election. But, it does not resolve the basic problem created by deregulation; the 61 trillion dollars of derivatives - the unsecured bets on secularized mortgages on the books of the financial institutions. More debt than all the money in the world. The banks know what's on their books. They don't know what is on the books of the other banks. So they won't lend to anyone but most transparent and credit worthy at high interest rates.

The only way to fix the problem is to wipe the worthless derivatives off the books. The only sure way is to nationalize the banks and re-charter them like Sweden did in the 1990's. But, the basic belief system of the Republicans is against nationalization. If John McCain is elected, the credit problem will fester and depress the economy for the next four years. The GOP scheme is to inflate the debt away but the numbers are so huge that the inflation will only make the dollar worthless.

[TomB]

Obviously everyone is rightly upset at the idea of our government going in and using its money/our money to bail out these companies. But it seems to me that this represents something even worse.

After all the entire attempted purpose of all this is to give ... confidence to the markets and the American people and etc. and so forth, right?

But what about confidence in the government? Both economic and moral? Even if this had been done smoothly the first time around the damage done to the idea that the government wasn't monstrously corrupt just seems to be to be enormous.

But now, when we see that oh yeah, it's more likely they only wanted to add some more *individualized* slush to the trough, the only possible conclusion is obvious.

In brief these Senators and etc. aren't just in favor of transferring our money to "the markets," they're in favor of transferring away our economic and indeed even our moral confidence in our entire system of government too.

Seems to me this obscene orgy just shows there is absolutely nothing some of these folks won't betray for their own interests. Nothing. Not the economic well-being of the nation, and not its fundamental civic foundation either. Nothing. They're selling it for a song.

Cheers,

[zanzibar]

As usual our elected Senators and Congressmen do not represent OUR interests. This is nothing but a transfer of wealth from working Americans to US & FOREIGN investors. It will not solve any of the credit related problems. Why?

First, banks mistrust each other because all their balance sheets are opaque. Notice how Paulson, Cox, et al are pushing for more obfuscation and fighting tooth and nail against transparency.

Second, all the banks have INFLATED asset values on their books. There's a reason why no private investor who looked at Lehman's books decided to bite. Look at the price Citi paid for Wachovia compared to their book value reported on their most recent financial statements. And now under this plan the Paulson will purchase toxic waste at even more inflated prices.

Third, all the major banks, specifically those in Europe are severely under-capitalized. Banks like DB & Barclays are levered 50x/40x. DB's balance sheet is nearly as big as German GDP!

The interbank market is frozen because of the above. The Paulson Rape US Taxpayer bill will NOT solve the above. There are many small and regional banks in the US that were prudent through the entire credit bubble have solid balance sheets and are well capitalized. The US banking system will not collapse. In fact these banks should be rewarded for their strong fundamental management principles by allowing them to expand by buying assets at market prices rather than perpetuate failed policies that weaken the system further.

There are large pools of private capital (I know of several of them) that would be happy to buy assets at CURRENT MARKET prices. Banks will not do that when they can sell to the US taxpayer at above market prices. As a result we are seeing the entire system moving to severe distress at the margins while the clearing process is frozen. Banks are also behaving in a predatory manner. Why lend at low rates to weaker banks when they can use the cash to buy assets in forced mergers GUARANTEED by the US taxpayer. Folks, we are being gamed.

Those that believe this $700 billion revolving credit line is going to end at $700 billion also believe in the tooth fairy. The way this plan is constructed will provide a temporary palliative of confidence just like the Bear Stearns bailout or the Fanron bailout but in the intermediate term will further exacerbate the credit market failure since it does not address the root of the issues.

While Paulson and the Republican and Democratic party leadership are using SCARE TACTICS to rail-road the American people for an UNLIMITED BLANK CHECK - Bernanke's helicopters were in full dump mode. Just this past Monday they pumped $630 billion. This is not a typo. This is a single day's helicopter drop mostly to foreign central banks. No Congressional authorization - nothing!

At the end of the day look who are pushing for this bailout - Wall Street, private investors like Warren Buffet and Bill Gross, the European elites who want US taxpayers to pay for the foolishness of their banks and Asian SWFs that want to get their money out of their bad investments. None of these folks CARE about Main St USA.

This is a direct attack on working Americans by financial elites around the world. This is new world war with trojans in our country - they just happen to be our financial, corporate and political elites!

We have to fight back. We have to assert our sovereignty for the sake of our children.