October 2, 2008

A Few Key Concerns Re- the Bailout Bill

This is a very rough draft, but I thought impt. to get it out.

We may well be at a make-or-break moment like few our country has faced before. So pls try to digest this sufficiently to pick out a few points you can relate to and call your congresscritters NOW.

Under the Bailout Bill, Paulson's Authority to Buy Bad Debt on Behalf of Taxpayers Is NOT Limited to U.S. Firms, or Even to Debt Secured by U.S. Properties

As stated by Rep. Brad Sherman (CA) on CNBC (video here):

"The Bank of Shanghai can transfer all of its toxic assets to the Bank of Shanghai of Los Angeles which can then sell them the next day to the Treasury. I had a provision to say if it wasn't owned by an American entity even a subsidiary, but at least an entity in the US, the Treasury can't buy it. It was rejected.

"The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can't be sold to the Treasury.

"Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it, and the bill has been carefully written to make sure that can happen."
See also this.

"It's the Derivatives, Stupid"

Much discussion I've heard talks about this bill as if it enables Paulson merely to buy mortgages, or interests in mortgage pools, and suggests that even if the loans are bad, they're only partially under-secured, so there's no way we'll lose more than a portion of our money and we might even come out ahead if we buy these assets at bargain prices.

This is a red herring.

Paulson is NOT limited to buying mortgages and interests in mortgage pools. Bad mortgages are only a small part of what he can buy, and they are only a small part of the problem -- only 5%, according to the gov't's own, recent report; derivatives are 95%.

These derivatives are basically shallowly secured bets. So, the much larger problem is the layers of leveraging on top of mortgage pools. See here:
“I think the $700 billion will be like a drop in the bucket because the total credit market in the U.S. is something close to $60 trillion. Then you have the CDS market – credit default swaps – of around $62 trillion. Then you have the whole derivatives worldwide worth about a notional $1,300 trillion. So the $700 billion is really nothing and the Treasury is just giving out this figure when actually the end figure may be $5 trillion. . . the problem is not that home prices have gone down; the problem is excessive leverage.”
I guess this is why the serious analysts I've read worry that this bill will do no more than delay our day of reckoning.

Why No Serious Discussion of Alternatives?

Such as:
1. The "Trickle Up" plan.

2. The progressive Dem plan described here.

3. Bill Clinton mentioned during his most recent appearance on The Daily Show that when faced with a similar situation, instead of buying bad assets outright, which sticks taxpayers with 100% of the risk, in a similar sitch under the Clinton Admin. we made LOANS which bore INTEREST. Note that under general legal principals, the first people to get paid off are lenders. Next, investors. Last, owners. So this approach would incentivize the people we're giving the money to get their houses in order and give significantly better assurance to taxpayers that both their original investment and possibly even some kind of profit will be recovered.

4. George Soros thinks we should buy equity, not bad assets. As suggested above, this approach would afford taxpayers more upside for less risk.

5. See also here.

6. And here ("In a Sept. 24 letter to congressional leaders, 166 academic economists [including three Nobel Prize winners] said they oppose Treasury Secretary Henry Paulson's plan because it's a "subsidy'' for business, it's ambiguous and it may have adverse market consequences in the long term. They also expressed alarm at the haste of lawmakers and the Bush administration to pass legislation.")
The Secret Pink Elephant

The Fed has been massively inflating the dollar as our only way out of this mess. Citizen wealth won't be eviscerated JUST by busted home values, or by hits to our savings though portfolio losses, or even by the bailout. We'll suffer as much or more through losses to our buying power.

(I saw this coming when we invaded Iraq while cutting taxes. There simply was no other realistic way to pay for it all.)

Elimination of the Mark-to-Market Rule

See here. Elimination of this rule means that the values claimed by companies for their assets need no longer have any basis in reality. Even assuming the new rule requires companies to estimate values reasonably and in good faith, proving that management understated values unreasonably or in bad faith will be all but impossible, since everyone agrees it's impossible to determine the values for assets for which there's no market (assuming you dismiss the notion that no market means the value is zero), and no one knows just how bad these debts are.

There will no longer be any meaningful basis for investors to evaluate companies' assets. Investors who understand the change won't want to invest in U.S. firms, and investors who don't understand it will basically be defrauded.

Elimination of the Up-Tick Rule

See this and sources cited therein.

Obviously, we need MORE, not less oversight, regulation, and meaningful DISincentives for bad behavior

. . . but this bill does NOTHING to bring those about; in fact if anything, it continues the trend
initiated during the Reagan administration toward dismantling such protections. The Glass-Steagall Act should be restored, as well as the up-tick rule and other protections.

The Secret Hot Pink Elephant

All financial institutions would prefer a free-for-all; but perhaps now we have the chance not only to re-regulate our own markets but to persuade other countries to regulate theirs, too. This would not only ensure a level playing field for our own markets and institutions, but promote fairness to investors, large and small, world-wide.

Who Will Administer the Assets We Buy?

We'll be buying the worst of what "professionals" have stuck themselves with, but we won't have the stronger assets to help us carry any losses and we don't now have the professional expertise to deal with what we'll be buying.

People talk about this as a "liquidity crisis"; but there would be no liquidity crisis if those who created it weren't seriously worried that what underlies it is a bunch of big losses. These "assets" will require active management.

And does anyone really imagine the government as run by the current administration is going to deal with these assets more efficiently than incentivized professionals?
Not really. As The New York Times reported ten days ago,
"Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

"Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

"At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees."

But aren't those the same people who drove the system off a cliff and couldn't fix it on their own dime?

Did You Know . . .

That Treasury Secretary Henry Paulson was Chairman of Goldman Sachs during the period for which it was investigated for fraudulent activity by Elliott Spitzer? (See Wikipedia on Paulson and Spitzer.)

UPDATE: Hm, looks like as of 10-15-08, the Wikipedia info on Paulson has been edited . . . no longer any mention of investigation of Spitzer's investigation of wrongdoing under Paulson's management of Goldman Sachs; instead, it says, "
Paulson led government efforts to avoid a severe economic slowdown."

No comments:

Post a Comment