Bailout becomes buyout

[freegood]

Summary: Fools in Congress didn't know what they were voting for, but that was good because the banking lobby who helped write most of the damn law would've squashed it if they knew they could be partially bought out or "nationalized"...
Go'bless Americuhhh ::wink::


http://ecoecon.wordpress.com/2008/10/09/recapitalization-and-partial-nationalization/
Noriel Roubini’s latest blog post should be read by everyone following the current financial crisis. It appears that our political system is so ideologically constrained and dominated by financial institutions that the only way to get legislation enacted that would allow recapitalization of banks through the purchase of preferred shares by the Treasury was to interpret non-explicit language in the bill as allowing the Treasury to buy stock in distressed institutions — as per the “Swedish Plan”…

Ironically it was the market that rejected Paulson’s plan and trumped the political process.

From Roubini’s blog:

The 180 degree turn in the Treasury position is driven by the disastrous market reaction to the passage of this legislation and to the realization that US banks are in such a deep trouble that, absent a direct partial public takeover of the banks this severe financial crisis will get much worse. After the Senate passed the Act on Wednesday there was no relief rally in the stock market: the next day Thursday the stock market tumbled by 5%; and then on Friday when the House finally reversed itself and passed the Act the Dow fell by about another 400 points between the time the legislation passed and the close of market.

Things got worse this week when on Monday and Tuesday and Wednesday stock prices tumbled even more in spite of new and aggressive actions by the Fed (interest payment on reserves and doubling of TAF on Monday; plan to purchase commercial paper on Tuesday; coordinated policy rates cuts on Wednesday). By yesterday Wednesday it was clear that we are close to a market crash that could – at this point - occur any time. When major policy actions for three days in a row fail to revive the stock market when such market is obviously oversold it is clear that there are no bottom buyers left and the risk of a 1987 like market crash is now at its highest level.

So by yesterday Wednesday it was clear that we were on the verge of a systemic financial meltdown and that that flawed TARP has been effectively Tarp-edoed by the market that realized that this approach to a systemic financial crisis was flawed. Thus Treasury and Paulson had to reverse themselves 180 degree and start supporting a direct partial takeover of US banks by the US government: you may not want to call is partial nationalization of the banks as the term is politically incorrect; but this is effectively what will happen as the US will directly inject capital – in the form of preferred shares (and possibly even common shares and sub debt) into financial institutions.

So where did Paulson get the authority to do such capital injection when there was no such authority in the wording of the legislation?

Here’s the story…

At first, Congressional aides we contacted were confused on whether the wording in the legislation did allow such public recapitalization was permitted or not. They pointed out to us that several sections of the legislation could be interpreted as allowing such public capital injection…

But we pointed out that this interpretation of “assets” as including preferred shares, left to itself, was a real stretch of the meaning of the legislation as preferred shares and common shares and sub debt are liabilities – rather than assets – of the bank. Thus, it was important to clarify that “any other financial instrument” was not limited to assets but also included institution’s liabilities such as stock, preferred stock, subordinated debt, senior debt…

Since it was too late – by Wednesday last week - to explicitly modify the legislation to allow for explicit wording on this matter and since Treasury was resisting such late explicit changes (that would have jolted the banking industry) the tool that was used (in full agreement with the House and Senate leadership) to allow for such interpretation was to have Representative Jim Moran use the October 3rd House floor debate right before the final vote to put on the legislative record such interpretation. See the following important exchange between Jim Moran and Barney Frank that is now on the legislative record of the House:

Mr. MORAN of Virginia. Thank you, Madam Speaker. I won’t take that much time. I do want to thank the chairman for his masterful leadership on this bill, and I do want to clarify that the intent of this legislation is to authorize the Treasury Department to strengthen credit markets by infusing capital into weak institutions in two ways: By buying their stock, debt, or other capital instruments; and, two, by purchasing bad assets from the institutions, in coordination with existing regulatory agencies and their responsibilities under this legislation, as well as under already existing authorization for prompt, corrective action and least cost resolution.

Mr. FRANK of Massachusetts. Will the gentleman yield?

Mr. MORAN of Virginia. I’d be happy to yield.

Mr. FRANK of Massachusetts. I can affirm that. As the gentleman knows, the Treasury Department is in agreement with this, and we should be clear, this is one of the things that this House and the Senate added to the bill, the authority to buy equity. It is not simply buying up the assets, it is to buy equity, and to buy equity in a way that the Federal Government will able to benefit if there is an appreciation.

So Moran asks Frank to clarify that the explicit intent of the legislation is to allow the purchase of bank liabilities (stock, debt, or other capital instruments) not just assets; and Frank replies firmly that this is the case and that Treasury agrees with such interpretation. Done!


NYT:U.S. May Take Ownership Stake in Banks (http://www.nytimes.com/2008/10/09/business/economy/09econ.html?_r=1&hp=&oref=slogin&pagewanted=print)

[Mustard]

Hmm, as I think on it more and more, the economy and our fiat currency remind me of an omelette gone wrong. You have realized that your omelette is fucked up, so you do everything you can to try and salvage it somehow, but everything you try is futile because you end up fucking up your omelette more and more each time. Eventually you get to the point where you say "FUCK IT ALL" and throw away the mess, and start over right with 3 fresh eggs.

It really feels like we're getting to the point where we've done fucked it up trying to fix it, and re-fix it so many times that there is no hope of actually salvaging it anymore. When that day comes... The mind wanders at the possibilities.

[freegood]

The bailout hasn't begun yet.

[Mustard]

I understand that. I'm just a wee tad pessimistic that even if the rescue plan does what it is supposed to do, we're only putting a temporary fix on the real problem. I feel the real problem is fiat currency, and the fact that, well, I'll let the now reviled Alan Greenspan say it:

"under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.

[Fornicator]

Not to worry - our illustrious president spoke this morning and calmed the markets (calmed as in drove them down).

The short summary of his speech:

Uh ... well ... I blew all our money in Iraq. So ... uh ... well ... we're screwed.

I think the obvious outcome is Socialism - Brought to you by President Bush.

Pray for lube.

[Claydon]

Thankfully, Barry obama will save us! On Jan. 20th 2009, the seas will part, Jews will embrace muslims, and arch will cease to be arrogant!

YES WE CAN

oh and congress = fags

[Axel]

Not to worry - our illustrious president spoke this morning and calmed the markets (calmed as in drove them down).

The short summary of his speech:

Uh ... well ... I blew all our money in Iraq. So ... uh ... well ... we're screwed.A fair assertion

The Iraq War Will Cost Us $3 Trillion, and Much More (http://www.washingtonpost.com/wp-dyn/content/article/2008/03/07/AR2008030702846.html)

Sunday, March 9, 2008;

There is no such thing as a free lunch, and there is no such thing as a free war.The Iraq adventure has seriously weakened the U.S. economy, whose woes now go far beyond loose mortgage lending. You can't spend $3 trillion -- yes, $3 trillion -- on a failed war abroad and not feel the pain at home.
...

It's a pay/pain time, folks!

Thankfully, Barry obama will save us!Seriously, do you think he can fuck it up worst than Dubya already did?

[mongo]

Seriously, do you think he can fuck it up worst than Dubya already did?

no. neither can mccain. neither can ron paul. neither can larry the cable guy.

[HAWK]

A fair assertion

The Iraq War Will Cost Us $3 Trillion, and Much More (http://www.washingtonpost.com/wp-dyn/content/article/2008/03/07/AR2008030702846.html)

It's a pay/pain time, folks!

Seriously, do you think he can fuck it up worst than Dubya already did?

I had kind of forgotten Bush promised it would only cost about $200 billion. Now I'm pissed off again.

It's BS that the war in Iraq could have paid for the bailout and still had a shitload of $$$ left over.

[Genius]

Thankfully, Barry obama will save us! On Jan. 20th 2009, the seas will part, Jews will embrace muslims, and arch will cease to be arrogant!

YES WE CAN

oh and congress = fags
This financial crisis has me down. Then I remember that you'll have to put up with Barack Obama in the White House for at least four years, nominating a couple of Supreme Court justices, nationalizing health care, ending the war in Iraq...all supported by a Congress with a Supermajority of Democrats, led by dooshbag liberals like Nancy Pelosi and Harry Reid...

And for the first time in a while...a smile.

[Fornicator]

Seriously, do you think he can fuck it up worst than Dubya already did?

No, but I know a 'plain speaking' moose humpin conservative who can.

And would - when McCain kicks the bucket six months into office.

[Hanover Fist]

No, but I know a 'plain speaking' moose humpin conservative who can.

And would - when McCain kicks the bucket six months into office.

I'd have to think the Vegas odds are higher for McCain surviving a full term than Obama.

[Genius]

Well, Joe Biden even looks a little like Lyndon Baines Johnson. Would President Biden escalate combat in Iraq, wearing himself out in the process, so much so that he does not seek re-election in 2012?

[machwa]

I'd have to think the Vegas odds are higher for McCain surviving a full term than Obama.

I agree since McCain/Palin has been pushing the whole "he's a terrorist/terrorist sympathizer" bullshit this week.

[vasili denisov]

Hmm, as I think on it more and more, the economy and our fiat currency remind me of an omelette gone wrong.
How do you get to that point? The problem with the last depression was lack of money in the system; the problem with this crisis is lack of money in the system. A currency tied to gold would only make the problem much, much worse.

[freegood]

Thankfully, Barry obama will save us! On Jan. 20th 2009, the seas will part, Jews will embrace muslims, and arch will cease to be arrogant!

YES WE CAN

oh and congress = fags

You are one odd little midget. This crisis has nothing to do with Obama, and Congress passed the law Paulson and Wall Street wanted. The only saving grace for Paulson now is some obscure loophole Congress had to compromise to get in.

Are you suffering a meltdown or are you bordering empty in that gas tank of yours?

[Fornicator]

I'd have to think the Vegas odds are higher for McCain surviving a full term than Obama.

So, you're buying into the "Obama will be assassinated" rhetoric.

Admittedly , there are a whole lotta right-wing wackos with guns and other weapons of mass destruction out there. Left-wing wackos (not sure this is an accepted term of art), tend to spike trees instead of people.

However, I suggest you look at the before and after pictures of presidents. McCain already IS the after picture. The job takes its toll and McCain doesn't have that much change in his ashtray.

In any event, we currently suffer greatly from an admitted cowboy (aka rebel, aka maverick) administration. When you're standing in a hole this deep, all paths look like they lead up. But 'more of the same' is filling up the gas tanks of the John Deere equipment digging this F'n crater.

[BIG PIZZLE]

I should totally be president.

[Mustard]

How do you get to that point? The problem with the last depression was lack of money in the system; the problem with this crisis is lack of money in the system. A currency tied to gold would only make the problem much, much worse.
I disagree with your assertion that "a currency tied to gold would only make the problem much, much worse." If its done right with good faith, like between 1880 and 1914, we would see inflation rise 0.1 percent annualy, and the populous would rest easy knowing that their money is backed by more than just faith, it would be backed by true stores of value like silver, gold, palladium, and platinum.

This is how I see it. I see a shit storm coming and I think it can't be stopped, so what is the natural respose? We do something about it of course, you know, to lessen the harm that storm does to us and our own. Heck, maybe there is even a "hail mary" play that we could pull out of our asses? But you know what I see is actually happening? Not enough, and that just doens't make sense. Its like watching a car come at you at 100 mph, and instead of getting out of the way as quickly as possible, congress just wants to see if they can lower the shoulder and hope to stop the car.

[Genius]

Since this mess has started, I've lost zero dollars, gotten two promotions, am making thousands more per year, have a ton more job security, and had some bitch run into me, which smashed my worthless car but left it still driveable and I got 2 grand out of the deal. If this is how financial crises go, I'd like them to continue.

[Mustard]

Since this mess has started, I've lost zero dollars, gotten two promotions, am making thousands more per year, have a ton more job security, and had some bitch run into me, which smashed my worthless car but left it still driveable and I got 2 grand out of the deal. If this is how financial crises go, I'd like them to continue.
Fair enough.

Since this mess has started, my grandfather's stock portfolio has lost $13,000 in value, my father has been laid off, three of his ex-co-worker friends have lost over $40,000 in their IRAs, and have just last week also been laid off and their once very prosperous place of employment has now shut down for the winter, and there is a good indication that it will be permanent.

Shall I continue?

[freegood]

I have 50 grand in unrealized losses on a stock I'm sitting on. It should make it back when I retire. Unless it goes bust or merges then goes bust.

[vasili denisov]

I disagree with your assertion that "a currency tied to gold would only make the problem much, much worse." If its done right with good faith, like between 1880 and 1914, we would see inflation rise 0.1 percent annualy, and the populous would rest easy knowing that their money is backed by more than just faith, it would be backed by true stores of value like silver, gold, palladium, and platinum.
Again, maybe I'm slow here but I don't see how this deals with the current problem of unwillingness to lend. This is close to the same issue (though arrived at for different reasons) as in the 1930s, when currency was gold backed. The problem isn't that people can't find a place where their money is secure; it's that's the money is staying in only secure places. As for the assertion that people would rest easy knowing their money is backed by more than just faith, right now money is getting locked in federal securities, whose backing is mostly faith, because the assets backing those securities is infinitesimal.

[Mustard]

Again, maybe I'm slow here but I don't see how this deals with the current problem of unwillingness to lend.
Well, this is where you've got me nailed. It doesn't really. I do think however that it would be a step back in the right direction, and with this credit crisis looming large, now would be a great opportunity to take advantage and back the USD with a store of value. 3 words though, not gonna happen.

But, with that said, I personally like the idea of my money (which really is just an intermediary and nothing more) to be backed by some store of value that is real, tangible, and substantial. Right now, with a currency backed by... nothing... what is to stop the government from printing trillions of dollars like Zimbabwe is? This almost assuredly cannot happen with a currency backed by something that isn't imaginary and isn't infinite, like faith (no religious overtones intended).

This is close to the same issue (though arrived at for different reasons) as in the 1930s, when currency was gold backed. The problem isn't that people can't find a place where their money is secure; it's that's the money is staying in only secure places. As for the assertion that people would rest easy knowing their money is backed by more than just faith, right now money is getting locked in federal securities, whose backing is mostly faith, because the assets backing those securities is infinitesimal.
Well, to be fair, it matters not if our currency were backed by a store of value or not, the FDIC would still ensure insured accounts up to 1/4 million dollars, which to my understanding wasn't created until 1933, four years too late for alot of people.

Now then, the biggest reason I can give you as to why I think a quadrametal backed USD would be better than having a fiat currency is because of the confidence people would inherently put in it. The psychological effect that would have on those in the banking industry might inspire them to be more willing to lend money. But really, thats all my idea really could do. But you have to admit that a psychological turn in a positive direction towards money can't be a bad thing, provided that the gov't were to place appropriate prices on the four metals given their rarity ratio to one-another. Some amount of ratios that would equal somewhere between 100 trillion and 1 quadrillion dollars worth of above ground metal doesn't seem unreasonable to me. In addition, that amount of available currency to us and the rest of the world that is backed by a true store of value would thrust the USD back into the forefront of currencies of the world, would reassure the USD's place as the currency of store in the world, and might serve to calm the credit tensions the banks currently have.

I think its a good idea, one better than having a fiat currency anyway. Would it help, maybe. Give it a 30 percent chance or so. But that is a hell of a lot better than the chances we are being given presently, at least I think so.

[vasili denisov]

But, with that said, I personally like the idea of my money (which really is just an intermediary and nothing more) to be backed by some store of value that is real, tangible, and substantial. Right now, with a currency backed by... nothing... what is to stop the government from printing trillions of dollars like Zimbabwe is? This almost assuredly cannot happen with a currency backed by something that isn't imaginary and isn't infinite, like faith (no religious overtones intended).
Well, the repercussions of printing a lot of currency on the order of Zimbabwe is that the repercussions are severe and immediate; the only reason Zimbabwe is able to do it is because it's a tyranny, and it no longer has anything like a functional economy, so hyperinflation doesn't impact things like exports, middle class buying power, or state issued bonds. In the case of the US, it would have an extraordinary impact on all three.

I think its a good idea, one better than having a fiat currency anyway. Would it help, maybe. Give it a 30 percent chance or so. But that is a hell of a lot better than the chances we are being given presently, at least I think so.
It's difficult for me to argue a subjective psychological question like non-religious faith; whether faith in a currency or a nation to be stable. I can only say that unlike religious belief, there are metrics that are associated with these things, which allow you to evaluate stability.

The current crisis is caused by investment in abstractions (credit swaps and mortgage securities), yet it's possible to easily evaluate these entities and make a strong case that they were very unstable and risky. It's possible to assess a non-gold backed paper currency and make an evaluation of variables associated with it, and the buying power of the currency. The illusions surrounding esoteric securities are only possible because they're so esoteric and hidden; on the other hand, it's very difficult to create a false value for a currency used every moment in an interconnected economy.

[freegood]

Spot on. CDS and entities like SIVS that keep it hidden from regulatory oversight allowed Big Banks to create an insane amount of money into the money supply in the form of credit.

A metal backed standard would prevent the Fed from printing more money, but this crisis had nothing to do the Fed debasing the dollar. Credit is credit. A credit default swap notation is as real as your CC balance. Governments can't say that it's illegal and cross it out with a sharpie.

The government's current solution does debase the dollar further, but not printing more now would leave us little to no options other than to "let the markets decide", a 15 year booming market that has been built upon faith on the dollar and easy credit.

And if there is the case against the government doing nothing, just look at our handling of Lehman. Bernanke and Paulson assumed it wasn't too interconnected to fail so they let it fall into bankruptcy instead of saving its creditors Bear Stearns style. A money market vanished overnight (along with its client's pension funds) and other money markets panicked and started hoarding money, called their loans, and prompted Paulson and Bernanke to propose the bailout. BTW- the inherent conflicts of interest of Treasury Sec. Paulson is so glaring that looking into it would make a person blind.

So yes, Ron Paul is right. But telling a swimmer that he's better off running while he's knee deep in the ocean isn't going to help us right now. The problem in Ron Paul's case is that no one will listen to him when the system appears to be working while it's handlers' greed is making it unsustainable.

[Grieves]

NIfH0vY2ANA

[BIG PIZZLE]

Here's what I think. Everything is linked. If the government pumps 700 billion dollars in the markets to save these companies, that's gonna cause crazy inflation and individuals will be hurt. If they dont pump billions of dollars into the economy, stocks will eat shit and no body will want to touch america (that's assuming that they'll still be able to), also inflation?

If the root of the problem is these shitty loans (that's a big assumption) and presuming the people responsible for this are the banks and the individuals, why not attack the loans themselves?

Set a two cielings for these loans. 4.5% and 9% Boom. On top of that, take a 1% tax so the actual rate would bt 5.5% and 10% and the government gets a little cheese. This way, individuals are getting something pretty sweet, a tiny mortgage rate they can afford. The mortgage companies take a hit, but they still get money coming in.

THEN make a portion of the home value not dischargible in bankruptcy. So something like 10% to 30% (depending on the value of the home or the value of the BK estate or somethign like that) of the mortgage amount will be still be owing, even if most of your other debt is discharged in bankruptcy. If I'm stuck with my student loans, these morons should still be stuck with their shitty mortgages.

That way, these mortgages will still be worth something no matter what. Probably not as much as they should be so banks will still get hurt on these assets, but they've got cashflow and americans still have their homes which will stabilze the market. This puts the burden on who fucked everything up in the first place, banks and individuals with these shitty loans, and not the average tax payer.

I dont know if this is like the McCain plan but I think he has the right idea here.

[Fornicator]

A lot of the dialogue focuses on 're-stabilizing' the housing market.

The more I hear this phrase, the more it seems to mean: bring housing prices back up, so all these mortgages can be sustained. A core issue was that housing prices were inflated. I suppose you can argue that stabilizing prices where they now are makes sense. But the 'buyout' effort should be more about stabilizing credit than housing.

A big piece of the economic issue is that we had an inflated sense of wealth. Productivity and potential GDP have grown, but not as much as the 'wealth' in the market. This is not sustainable. A market correction will (and has) occurred.

From everything I read and hear, we have credit waiting in the wings, not necessarily for things to stabilize, but for prices to flatten out a bit. Once we hit that point of blood in the water, the sharks will converge.

Housing needed a correction. Looking ahead, sound policies will focus on keeping wealth in line with reasonable growth (a.k.a. population and productivity). Neither candidate has much to say about that.

[BIG PIZZLE]

Stabilizing the housing market should increase liquidity which should fee up some credit but there's no way credit is going to be as loose as it was before all this shit.