in other news on the frontpage of cnn-business:

AT&T is having trouble in the commercial paper market (and they really shouldn't be), showing how frozen up that is day-to-day

The price of CDS contracts on U.S. Treasuries has risen significantly (although still very low comparatively).

I suspect if I really did I'd be horrified ;)

More Ron Paul telling us all we're doomed:

Ron Paul: Buying bad debt is the wrong solution - CNN.com

"You have to liquidate those mistakes. Those mistakes were made due to monetary policy. So you have to allow the market to adjust prices downward. And that's what we're not allowing to do.

"If there are too many houses and the prices are too high, the sooner we get the prices down to the market level, as soon as we quit trying to encourage more housing -- this is what we're doing. They're trying to stimulate houses and keep prices high. It's exactly opposite of what we should do.

"So, we should get out of the way and not buy up bad debt. There's illiquid assets, but most of those are probably worthless. They're mostly derivatives. And we're sticking those with the taxpayer. So we have to recognize that the liquidation of debt is crucial. And if we did that, we would have tough times, there's no doubt about it, for a year. But if we keep propping a system up that's not viable, we're going to have a problem for decades, just like we did in the Depression. That's what we're on the verge of doing.

His brand of doom makes a lot more sense to me.

Similar to how paying (my portion of) $700B for the mistakes of other people -- specifically those who loaned money they shouldn't have to people who borrowed more than they should have -- was never on my to do list.

It's sad because he's right.

Yup.

What I don't quite see is, after this bailout, how exactly will the housing and credit markets get back where they're inevitably going to go without, you know, the collapse of the housing and credit markets.

This is great. Marcy Kaptur is on it:

YouTube - Let's Play "WALLSTREET BAILOUT" The Rules Are... Rep Kaptur

She gets it and I pray that the rest of congress is listening. We must control these crooks!

heyyy...something else we agree on!

HOLY SHIT

France is going to propose a $300Billion bailout in the eurozone for banks! If they do that, and we do ours, we may actually shorten this recession instead of watching it fall into a depression. Consumer confidence will take a while to come back but this could help quite a bit.

Jon, the bailout is inevitable. Forget it and trust that Congress (Dems and Repubs.) and the financial policy makers now know what the fuck they are doing and will fix things for the future so this will never happen again.

You have that confidence, right? Right?

We're entering a golden age of government power and control. I'm sure nothing can go wrong from this.

Any link?

I love listening to Mark Cuban's thoughts on the closing of hedge funds. Charge you 20-25% of your profits as well as 2-3% yearly fee when things are great, but close up as soon as things are going south.

If a depression is necessary to change an obviously flawed system....count me in.

I'm all for big government and lots of liberal fluff and I don't like this idea :(

SI

CNBC chime in from MCsquared.

and for the person above who is ok with a depression please go do some research on the personal ramifications of a depression. I get the feeling that a lot of people have forgotten what it looks like so go look at some pictures and then say youre ok with it happening again. Im not talking down, I just want to make sure we're talking about the same thing here before we debate the merits of it.

hatcher - you got a linky on the france-thing?

Found this on Reuters:

http://www.reuters.com/article/marke...00238620081001

SI

Yeah, I know that was a stupid comment about being okay with a depression. I am just so blinded with anger about this crap.

nevermind - found it - and according to Bloomberg it'll be $442bn not $300bn

http://www.bloomberg.com/apps/news?p...RJc&refer=home

Would that mean that our bailout plan won't have to support foreign banks?

Yeah, 300B Euros

SI

Really? I'd love to see a source on that and read about it

SI

Good story from NPR's Morning Edition today about the 200+ economists opposed to the bailout plan: Bailout Clash: 200 Economists Vs. The Senate : NPR


It seems to me that there are two problems here.

One - Credit Markets are Tight

It's undeniable that the credit paper market has tightened up a lot and this is a risk to the economy. It's affecting small businesses a lot and medium-to-large businesses somewhat (see the above story on Caterpillar having to raise its interest rate on its bonds in order to get takers).

Cochrane (the author of the economists' petition) suggests a direct solution to this problem (as opposed to the indirect solution(s) being proposed in the "bailout bill". Since the Fed is the lender of last resort, change the rules temporarily to make it far easier for banks to borrow money from the fed. Since there are still banks that are solvent and willing to lend, give them the tools to continue to do so and ease the strain on the market more.

This solves the immediate problem that's got people freaked out without a cost to the taxpayer.

Two - Bad Assets

What I think many, like Paulson & Bernanke, have finally realized, is that the financial system mess isn't going to be over until all of the bad assets are cleared off the books of these institutions one way or another.

This concept seems to be the fulcrum of opposition to the bailout bill.

On one hand Paulson is basically asking for the government to sponsor a "reset" of the financial system by spending money to clear the books of all of these institutions, allowing them to operate with transparent (to them) balance sheets again.

On the other hand, a coalition of right-wingers and left-wingers are saying either "let the market work and let them sort out their own mess or fail" or "this is basically a get-out-of-jail-free card for banks as paid by the taxpayers", respectively. Both have good points. For the right, it should be noted that Citi mostly bit the bullet and cleared its books, which allows it the position it has now, while JP Morgan and GS mostly divested in 2006 because they thought the subprime market was BS (GS' switch from investment to depository bank is, as I understand it, a move to allow them more avenues to capital, which is a smart decision in a market with less capital floating around). For the left, the argument that there should be accountability seems reasonable, as does a request for any bailout to also address the economy, as was done in the 1930s, if in fact the government wants to claim this is a Depression-Level crisis.


I agree with where Paulson is coming from. The fact is that we've floundered around for the past 2 years (at least), hoping that everything will turn out OK in the end. The Paulson plan is the quickest route back to "normal", but at a tremendous cost (and potential liability) to the government and taxpayer. Worse, it changes nothing about the financial system that got us here in the first place. If we "reset" without changes, we'll be here again in 20 years, as we are here about 20 years after the S&L crisis.

Again, I come back to the Sweden Plan:

1. Yes we, the government, will bail you out and wipe these bad assets off of your books. But we'll pay whatever we want for them (and since they're basically worthless, that's almost nothing) and we want a pound of flesh from you in terms of equity. Holding equity does two things: 1) assures other investors, because the government can afford to hold that equity until the financial institution rebounds to good market rates and 2) gives the government a chance to recoup its losses.

2. If you don't like our terms, you're free to do something else. For instance, you could get a Sovereign Wealth Fund to bail you out, for equity (i.e. what Saudi Arabia's SWF did for Citibank). Or you could sell out to a solvent bigger bank (WaMu to JP Morgan, for instance). Or you could just go bankrupt and the FDIC will refund your account holders while your shareholders take a bath as with any other company that goes bankrupt.


The government is in a position of enormous leverage right now and should use it. There are a ton of financial institutions who are collapsing under the weight of opaque bad assets and desperately need someone (or some way) to get these off the books if they are to continue operating. It's in everyone's best interest that these get cleared quickly, but it makes no sense that the government should do it without getting anything in return.

And that's really the crucial problem of the past two weeks. Paulson, Bush, the Congressional Leaders, and all the talking heads on the financial shows are being so blinded by the need to get this sorted out and "get back to normal" that they've convinced themselves that the financial institutions should just get effectively a blank check, a pat on the head, and told to go on their way. Amazingly, I think the American public has (for once) seen through this. Why? Because I think Americans actually intrinsically understand that what the "banks" are doing is like your kid who drives your car into a tree. It was a ridiculously stupid thing to do, and that kid's going to pay for it, both in the short term (grounded) and in the long term (you're paying for the high insurance premium, bucko). The "banks" are asking to get away scot free ("for the good of the entire economy") and we finally aren't buying it.

I've never even heard of the Constitution Party. That being said, this is a good read:

“They Just Don’t Get It”—Political Leaders and Pundits Are Clueless About Bailout Rejection

"....His name is Darrell Castle, and he is the 2008 candidate for vice-president of the Constitution Party. Castle has spent the last year traveling around the country meeting people on Main Street and listening to what they have to say.

This is what Castle proposes in the Constitution Party's latest newsletter:

“The Federal Reserve Banks should be seized by Congress under Article 1 Section 8 of the Constitution. The FED banks could survive as clearinghouse banks, but the Federal Reserve that has robbed the American people for 100 years would cease to exist. The debt owed by the American people to the FED banks would be discharged in bankruptcy. Congress would take monetary policy from the FED and would simply stand in place of the FED through a monetary board. The FED credit computers would be transferred to Congress who would issue new credit (money), because under our present system 97% of all money originates as credit. This new credit would keep the system going and prevent collapse. It could all be done without interest and without debt. The backs of the international banking cartel would be broken forever, and the American people through their elected representatives would control monetary policy; i.e. money in circulation, interest rates, and credit availability.”

Pearlstein, Bush, Paulson, Pelosi, et.al., along with Obama and McCain, should also read the U.S. Constitution. Then they would see that the problem stems from the fact that in 1913 Congress privatized our money supply by turning it over to the private banks that own the Federal Reserve System. This is also why we have lived under the mass delusion that a healthy financial sector leads to a healthy producing economy.

Actually it’s the other way around. The financial sector should support the producing economy, not bleed it dry through interest, fees, commissions, and the destruction that arises from financial profit-seeking.

There is also the fact that while the producing economy has been hammered by job outsourcing and bled white by financial parasitism, it is still a powerful machine that can produce the goods and services people need. We are a strong, capable nation. And we are blessed with the resources we require for a decent standard of living, though not necessarily at a rate of consumption that forever outpaces the rest of the world. But what is wrong with that? The underlying strength of the producing economy was on display this morning, when the Dow-Jones defied the doomsayers by coming back strongly the day after the bailout was defeated.

We now need to do what Darrell Castle of the Constitution Party recommends: Use the power of the money supply to rebuild the producing economy that we have given away and rebuild it from the bottom up: from Main Street.

Unfortunately the fat cats and their political and media apologists “just don’t get it.” But the American people and the members of congress who voted the right way yesterday do."

+1

I agree with flere - i think like 100%. in case i haven't made that clear.

The reason so many people are against the bailout is because of shit like this:

http://blogs.moneycentral.msn.com/to...n-history.aspx


The best temp gig in history

Congress wants to crack down on CEO mega-salaries for banks participating in the bailout. And while the politicians argue how best to do that, Alan Fishman of Washington Mutual is headed for the doors with $19 million in his pocket.
If that wasn't outrageous enough, consider this: Fishman started the job three weeks ago. I never saw the employment ad Fishman answered, but it must have read something like this:

WANTED: Top executive for train-wreck bank about to be seized by federal regulators. Must be able to look busy while FDIC sells business from under you. Previous experience with angry shareholders sitting on worthless stock a plus. Perks: $7.5 million hiring bonus and $11.6 million cash severance.

Fishman got the best temp gig in history. He gets to keep the bonus and severance pay, though he must stay on the job while JPMorgan Chase completes its purchase of WaMu's banking assets.
To be fair, Fishman wasn't the one that took WaMu down a path lined with toxic mortgages and other bad assets. No, that role belonged to former CEO Kerry Killinger, who received $54 million over five years before leaving earlier this month. He's eligible for around $20 million in severance pay.
Other execs are also cashing in big. President Stephen Rotella gets $12.7 million in cash if he's terminated or quits with "good reason," according to the Portland Business Journal. And CFO Thomas Casey would get a cash severance of $6.3 million.
And WaMu shareholders got huge payments of...oh, wait. The stock is worthless. Shareholders got wiped out.

CEOs are going to be able to walk away with a lot more money without all these toxic assets on the books.

I realize that Congress is trying to create the appearance that that won't end up being the case, but ya, it will end up being the case. That's our next scandal - misappropriation of bailout-created assets.

I thought I heard yesterday that they had found a way to prevent Fishman from getting anywhere near that whole package but it was from a friend who works there so take it for what it's worth.

How do you control CEO salaries? Everyone says cap, which I think is a bad idea. Can you structure compensation packages in a manner that rewards long-term success. I don't mind paying a CEO whatever it takes, as along as he delivers and creates a financially-strong balance sheet to go with it.

You're thinking of Lane Kiffin. :lol:

I don't like the idea of a cap. It seems too arbitrary. Of course, one could argue that CEO salaries are pretty arbitrary, and they'd be right....

The correct place for a solution is at the board level. Ideally the board will be full of people who value long term success and will reward for it and punish when it's lacking. Also ideally the board would feel this way because the shareholders not only a) want long term success but b) are willing to vote in a board who feel the same way.

That's where it all breaks down. First of all, while some shareholders (maybe most, who knows) want long-term success, the market wants quarter-by-quarter success. The market wants exploding share prices off of which to make a quick profit or at least good dividends each and every quarter.

Secondly, even if shareholders wanted long-term success, the vast majority of shareholders aren't vocal/involved enough to vote the correct board slate.

I don't know how you solve it, but I suspect it involves a complete mindset change. We're so anti-saving in this country, so interested in immediate gratification, that we want to see results now, and so there's little reason to change to a long-term view. Maybe if we all get spooked by this and start saving and start demanding that the companies in which we invest show consistent good returns over a long-term period we'd finally see a correlation between lasting results and CEO salaries, but I still doubt it.


The one thing I would like to see, that's somewhat related, is some tighter regulation about CEOs sitting on each others' boards, which is a practice so rife that it's clearly being abused on a regular basis.

Not one of my favorite NPR stories on it. Sounds a lot more like what we're hearing here: "I can still get money from a bank so the economy must be ok!" I need more than that from economists.


I'll argue with problem number 1. I don't remember where I saw it the last couple of days but taking away the stigma from loaning from the fed with low rates last year by cutting some rate (the discount rate, or something) and removing transparency (these couldn't be tracked) is what got us into a lot of this loaning mess with banks over the last year.

As for the solutions, I'm onboard. Heck, I think those two were in my "proposal" yesterday :)

SI

Yep...and IMHO there is absolutely no doubt that it will happen. The question is...how much and will it bankrupt the fed?

That's the inevitable "worst case" scenario I see with a bailout. Odds of happening? I dont know if anybody could answer that with any credibility.

Serious (if not slightly ignorant) question...if all FI's fail tomorrow(or even if not)...whats stopping the government(other than the obvious partisan nonsense) from creating a new government-owned & operated national bank? Free from debt, free from bad assets, etc. and with an obvious ability to lend money, perhaps cheaper than private banks.

weird stuff happened with AMD's stock at the end of the day:

What happen? Did they track down the Google problem yesterday?

I don't like the idea of a cap either. I've heard that proposals of a CEO not being able to earn X amount times the average employee. I don't think its the government right to tell anyone how much they can "earn" in that sense (unless the government has a stake or taken on debt of that company). Plus, a financial services company will always pay more than a retail operation, no matter how successful the CEO of the retail operation is, due the high-paying jobs that a financial services will offer. The problem with executive is that base salary has gone, and stock options have just grown out of control. I like the idea performance-base pay, but it just doesn't seem to work. The problem with the boards is who votes on them. As you noted, quarter-to-quarter success instead of a long-term focus. Hedge funds and other deep-pocketed investors are able to control boards due to the large amount of shares they own in a particular company.

What about these ideas:
1) Golden parachutes should be abolished.

2) Tax the hedge funds and others maintenance fees as regular income tax, instead of the old capital gains tax they are able to use.

3) Extend the Capital Gains Tax requirements longer than the one-year period. All income gained before this period will be as income. This will force people to hold on investments longer, instead of looking to make a quick buck.

4) Offer CEO's and execs straight up stock as part of it's compensation package. No tricky, backdating, re-pricing, stock options. Require them not to be able to sell or transfer their shares for a certain period of time. If they do, they'll forfeit the rights to these shares.

misdirected trades yesterday. They were cancelled.

Today's issue with AMD im not sure about yet.

Capping CEO salaries is not the solution, what needs to happen is massive reform of the corporate ownership system. Shareholders need to insist on high transparency of what a company is doing... and take their investment dollars elsewhere when corrupt CEOs stub up and refuse to play.

The solution to the subprime mess is someone five to ten years ago being able to see a balance sheet breakdown of these companies, notice massive leverage ratios and billions in assets covered with question marks... and then pulling all their money out and shorting the crappy company, tell everyone that the financials are messed up.

What I would really like to see out of this mess is not more government regulation about how a company should behave, the government is always asleep on the wheel. What I want to see is a standard of "Show us your books, or I take my money elsewhere and your crappy bank can go down the tubs". We need some truly ruthless and smart investors to see the profit in exposing fraudulent practices and companies, and protecting their money by looking for places willing to do their business in public.

Right now all the ruthless and smart people are just working at exploiting all the suckers in the U.S. economy, which is pretty profitable until you run up against fellow greed machines and overextend your position to the point where one mistake costs a billion bucks. Less smart investors are going to have to learn to LOVE their 5-8% growth that they get with a fully transparent economy... and leave the megagrowth funds based off derivatives and wacky business deals to the sharks who know those returns can evaporate if any light is shed on them.

We don't need super high growth rate mortgage banks, the whole point of being a banker is you can sit on your ass most of the day, make a few high quality loans, and collect interest while sipping margaritas. Take your cut and relax, don't keep pushing it for an extra percent at higher and higher risk levels (or buy AAA rated 'low-risk' stuff without understanding enough about it to see its really F grade junk paper... oh my goodness, doing basic research, its like they are being paid to handle money, oh wait they are...)..


You reset the incentive structure so everyone stops looking for money out of imaginary numbers, and you can pay CEOs whatever you want, because a good CEO who knows how to spot crap investments and avoid losing his company billions will be worth his weight in gold (even Ron Paulites can agree with that sentence!). If you pay someone to cook the books, they will do it, and as we have all just seen, they will do it extraordinarilly well to the point of massive economic damage.


Also, seize assets of any executive who has committed fraud, including misrepresenting contracts, violating mortgage regulations, insider trading, ignoring leverage controls, etc... you won't catch many cause most of the crap they did was perfectly legal.

All I have is blurbs from NYTimes articles. The originaly S&L bailout cost around $450-500B. The government was able to sell off most of the "bad funds" and all the taxpayers had to pay in the end was around $120B

NY Times Advertisement


So it wasn't like the government took over these funds and at all the losses. They made good money off it and the tax payer was not charged nearly as much.

I wonder if the opposition would be so spirited if people knew that it may only cost taxpayers $200B or less when all is said and done?

Email from John Campbell US Rep for 48th California District....

"Bail Out: The assets will be bought from companies at probably 30%-60% of what they paid just a year or two ago. If I offered to buy your house that you bought 2 years ago for half what you paid for it would I be bailing you out?"

I almost stopped reading after he promised we'd break even on this , but I'm DEFINITELY done reading after this gem.

Does that include the cost/foreclosures of this mess that that helped cause?

Edit: By that, I mean, how "cheap" the S&L bailouts were - we should really include this $700 billion in the cost of those.

Why? Do you not think banks are going to take losses on the sales of these securities (to the extent they haven't already taken the loss by marking them to market or writing off the investment)?

Sarbanes-Oxley has been fairly effective at this. In the 90s, it was much more rampant, but a study out of U Penn showed only about 4% of companies had recipricol board members. Googling shows that in the early 90s this was as high as 1 in 7. The Penn study concluded that "networked" companies were still a problem--one CEO sits on another board, the CEO of company 2 sits on Company 3's board and Company 3's CEO sits on Company 1's board.

Bravo!

shortselling ban extended.

Senate passes the bill

by a wide margin, thank god. There is hope for Friday after all. The new bill has the AMT extension in it which is another thank god. FDIC raises limits....looks good to me. Yes there's more stuff including some pork but Ill take it as opposed to doing nothing.

Ha, back to business as usual I guess.

Asian markets down anyway (when they were down after the House voted the bill down, that was cited as proof that it was a mistake to do so).

Tax cuts are the opposite of "pork".

The wonderful world of democracy - in order to make a spending package palatable that is rejected because it's a huge financial impost on the American people they increase the cost by $105 billion :D

That's the problem, since this "had" to happen, they really could have thrown anything in there.

If there were a provision for every Congressman to have an army of monkey butlers assigned to them, it would still pass, because we have to do "something".

however I explained it otherwise....didnt matter though.

Yes, the banks will take losses. But more important to me, Joe Taxpayer, is whether they are worth anything at all.

Let's take an example. If these are bundled bad loans with little chance of repayment, say, a bundle of loans from badly inflated mortgages in California. Then, there's a chance that a very small percentage of them, say 20% will actually be paid back. However, if the government swoops in and buys them for 60% of cost rather than the 20% they would get on the open market, the banks certainly are losing money from the 100% they were initially. But, really, they don't take the loss they should have on the market.

Speaking of which, I heard mark-to-market was being suspended/adjusted so companies could pretty much put down whatever number they want for the value of these securities. This system is about to be horribly screwed.

SI

As taxpayers we're constantly putting money into things that may or may not be worth anything. On that level how's this any different?


Well they can't put down any number they want. Do you really think that they should value them all at zero though? The problem is that nobody knows what they are worth. If they were worth 20% don't you think that people with enormous amounts of money would come in and buy them for 15-20%? Maybe they're worth 50%. Maybe they are completely worthless. The main point of the whole bailout is to get the credit markets open again with the banks.

I think its going to take quite some time to untangle these things and find out what actually has value and what does not. The question I have is why are people concerned that the banks take losses? Its like we need to make sure that the bank gets punished. I understand the banks acted horribly stupid as did mortgage lending companies and as did some customers even and nobody likes the thought of paying for their mistakes especially if they are someone who is in a good mortgage and making their payments.

I don't think its "fair" either that we're going to be footing the bill here but look at what is going on. Banks won't lend to each other. Look at the car sales just reported yesterday. Ford down 34%, Toyota down 29%, GM down 16%. Jobless claims are now the highest in seven years at almost 500,000. I don't think the people so opposed to this really are considering what the alternative is. Things aren't noticeably different in your life today probably but they sure would be if the credit stops flowing whether you rely on credit for anything or not (house, car, credit cards). In some way EVERYONE relies on the credit system - if its not you its your employer or their customers or suppliers or your family members. This is a worldwide problem. It sucks that irresponsible business people are going to get bailed out and businesses in any other line of work would have failed without anyone batting an eyelash for this kind of mismanagement and few people are happy about having the government get involved but give a good look to the alternative. Do you really want to see what would happen if unemployment went to 25% like it did during the depression? You're not willing to be hit with a tax bill but you're willing to take the chance of losing your job over this?

If anyone's got a way to keep the credit flowing without a bailout of some kind for these banks I'm all ears. I don't care about saving Citigroup or Bank of America or whoever. I do care about saving all of the companies and employees that will be wiped out if they can no longer get access to the revolving credit they need to run their business every day.

The Senate passing the bill was never really in doubt - the House is the problem and by no means is it the slam dunk everyone felt it would be Monday before the House shot it down. We're down today as well (about 150 as of right now) because I think people are being cautious. There was terrible news about the automakers and jobless claims are as high as they've been in seven years. On top of that you had people get in after the slaughtering on Monday and are willing to lock in some of those profits now just in case the House doesn't pass the bill.

Yep...and in all likelihood the more that sell (even if you assume the optimal 60%), the more the rest of the market(i.e. individual homeowners who need to sell) continues to deflate further. The more the rest of the market deflates, the more these "assets" will continue to deflate as time goes on until a market bottom has been established. In many areas of the country, it's likely this has established, but places like California, Florida, Texas, and the like have not with this methodology. Not to mention...I havent seen where the estimates of increased administration for these assets has been projected, or if it is even part of the bailout bill itself.

Thats why, IMHO, I believe a more direct route to this has to be the answer. Probably not exactly the way I suggest...but along these lines.

1) You increase borrowing capacity and lower fed rates(for say, 1 year) to FI's in exchange for (gulp) equity shares of the FI and transparency of the accounting to address the short term credit crisis. This may add a degree of inflation, but it is still putting the administration and risk onto the FI's to liquidate...and not the government.

2) You provide government assistance towards sellers of Primary Residencies with negative loan-to-market value sales. "Sellers" could also be FI's who are in possession of a defaulted home which was (at the time of foreclosure), a Primary Residence. The amount can be debated, but my ballpark on it is up to $50k or 75% (EDIT:of the negative equity, not the toal value), whichever is lower, for scaling purposes from market to market. This also motivates the FI's to liquidate quickly, but does not give them carte-blanche to abuse the system.

3) You also provide government assistance to buyers of current Primary Resdiencies (negative or otherwise, bank-owned or otherwise) in the form of down payment/closing cost % to encourage liquidation of these types of assets. My ballpark for this would be 2-5%, but very debatable.

I know there are holes to poke in that, and certainly there are bad practices which need to be addressed (almost) immediately to reduce corruption(i.e. appraisal process), but at least the risk to the government/taxpayer is mitigated more than giving Paulson the green light to start gambling on our behalf.

Simple: moral hazard. It's clear that no one in this whole mess was looking out for anything except their bottom line. If people get off with a warning and "don't do it again", we're going to be right back here in a few years.


I get that the sky is falling. I also get that we're looking at a "best of the worst" scenario- there is no great solution where we all come out smelling like roses. I'm all for spending money- again, I'm fairly fiscally liberal (tho I'm getting to realize that we're in this mess somewhat because of a weak dollar and that can be traced directly to the debt).

But of all the solutions out there for this problem, this $700B "blank check" to buy bad securities is one of the worst. There have been a couple of people who have made elaborate posts about multiple solutions to this problem (EDIT: hell, in the time it took me to write this post, there was one posted right above it). I have one a couple of pages back- it's 5 or 6 paragraphs long. And I'm sure it's flawed in many ways, as, again, we're in a "best of bad choices" scenario. However, it's certainly better than what Congress is proposing.

SI

The mark-to-market changes are horrific. The SEC has basically given corporations a blank check to value assets on their books however they wish. Fictional accounting here we come again!

Here's a silly question to ponder. I'm an individual with a substantial mortgage on my home. I have the money to start paying an extra amount on top of my monthly rate. For argument sake, we'll just say that I'm able to pay an additional 20% of my monthly payment, which goes directly against the principal amount.

Which option currently helps the banks more in their current financial situation? Pay the exact monthly payment and remain status quo or pay the extra amount, which would increase their immediate capital, but would reduce the amount of interest income they receive from me over the life of the loan? Note that I'm strictly speaking from the bank's perspective and not the home owner.

That "something" has to be something that congressmen can to take back to their districts to justify voting for the bill to avoid suffering electorally otherwise it'll change no one's mind. The massive public opposition to the bill is, I believe, what caused many facing re-election to vote against it, particularly Democrats. So the "something" has to be seen as beneficial to "Main Street". I presume the tax cuts are aimed at doing that.

But the cuts have to be made up somewhere, either by increased taxes elsewhere or by cuts to projects, neither of which can impact Main Street if this is to be persuasive. Apart for $45 billion from "debt relief :confused: I've not heard where the other 105 billion comes from.

You said that the stock markets were merely limited windows, which I totally agreed with, but that doesn't explain why you found the drop after the first bill died so telling.

Others (not you) implied that the stock market would see similar losses every day until something was passed, and one person compared the $1.2 trillion paper loss on that one day to the $700 billion bailout. Apparently a dollar to dollar comparison was relevant, even though a stock market is merely a limited window.

Obviously, a lot of that is fear-mongering. Fear-mongering (as liberals often argue in a completely different context), is very dangerous for two reasons. One, it creates policy that isn't necessarily good. And two, it can create a resistance to dealing with a REAL problem. Maybe I'm just experiencing that second part. (i.e. when people overstate say, a threat from terrorism, it can create the myth that there's no threat from terrorism. See all the people complaining about airport security when better security alone might have prevented 9/11).

I'm sure whatever they do, they won't just mark it to whatever gets them the most money from the Fed and screws us the most :mad:

SI

Technically-speaking this rule change won't change what's going to happen between Treasury and companies trying to off-load the bad assets. The rule only governs how they report their books. They're always free, outside of normal quarterly reporting, to state the value of their assets as whatever. We have to hope/assume that Treasury has enough intelligence and backbone to correctly value those assets and not overpay for them.

Analogy: A car dealer can try to sell you a flood-damaged car for $10,000, when its salvage value is $500. As long as you know it's flood-damaged (and you can), you'll probably not pay more than $500. However, the car dealer can't (legally) represent the value of the car as more than $500 to its insurance company. But if the insurance company did what the SEC has just done, the dealer could represent the value of the car as $10,000, because some sucker just might pay that much, and the insurance company would say "yeah, whatever, fine with us."

Basically it boils down to whether or not you trust Paulson to tend to do what's best for the Treasury or to tend to do what's best for his friends on Wall Street.

But the real problem with the rule change is that it makes these companies' accounting books opaque to investors/regulators again. Companies can now value assets on their books as whatever they'd like, and you have no idea how strong or weak a position they're in until they fail out of the blue.


The irony here is that Wall Street lobbied the SEC for the rule change on the basis that they're just sure their bad assets are worth something, even though the market says they're worth nothing. It's not fair, they said, to have to carry these assets at 0 value just because the market says they have 0 value. That's right folks, Wall Street doesn't believe in the free market when it's not in their best interest. :banghead:

capitalism doesn't work, friends. let's just get that out of the way.

I think your numbers are pretty far off. There may be some second lien loan portfolios that recover nothing (these aren't going to be marked at 60 right now though), but in general even subprime first liens are likely going to perform way better than 20 cents on the dollar. The devil will be in the details of course of which assets make it into the Troubled Asset pool.

Since it would become immediately apparent anyway, I admit up front to having no true understanding of the mechanisms of high finance. But if it adds to the conversation at all, I'd like to add some thoughts as Joe Homeowner.

* I can't shake the feeling that the politics of fear are once again being used to cram something down our throat. From the war in Iraq to the formation of Homeland Security to the Patriot Act, etc -- all were sold to the American public with a healthy dose of fear to make them palatable.

* I've read article after article to try to understand what's really going on here. One thing I think I know is that this was perhaps an inevitable turn of events, based on "investment vehicles" becoming so complicated that even so-called Wall Street experts don't really understand what they consist of. As a result, nobody really knows how to value them, and rating agencies [out of immorality or ignorance] continue to rate many of them as sound investments. It is a multi-layered and complex problem, one that requires a slightly more nuanced response than throwing an arbitrary and massive amount of money at it.

* We've already bailed our Freddie and Fannie, we took over AIG, we've overseen other major purchases -- have any of these actions done an ounce of good? What would happen if we did not dump this money into the greedy, risky, brutal world of Wall Street? Frankly, nobody knows. I cant help but feel that our legislators -- none of whom have a grasp for the real issues here -- are being swindled.

* I'm not a fan of free-market capitalism, or that the notion that the market will correct itself. I think it's time for the government to grab its sack and somehow ignore the army of Wall Street lobbyists influencing -- oops, I mean educating it -- and establish some real order and means of control.

Well anyway, that's kind of a 10-cent response, but I'm still tyring to wrap my brain around the whole thing.

The latter. In a credit crisis, cash is king. If the 700B was allocuted to go toward mortgages in default instead of to the banks themselves, that would be the best solution. Mortgages would get marked down to reflect current house prices and banks would get their income stream up and flowing again.

The soultion on the table simply gives banks money without doing anything to improve their cash flows. As such, it's handout and it's fucking pointless unless you're the one getting a piece.

Good comparison. No matter the merits of the bill, don't be all surprised that some are skeptical when you promise another Great Depression if we don't act TODAY.

Bob, you're exactly correct. Here's a quick primer for anyone trying to understand what happened to get us in this mess:

NOTE: powerpoint slides:

http:// pruningshears.us/storage/subprime.pps

The stock market is going to react to this and a TON of other stuff. The initial drop was due to the prior expectations that the bill would pass and then didnt. The rebound was on the speculation that the bill would go through eventually. The drop today is due to the awful jobs number and other things. A rally or drop tomorrow will be on the vote. than wait ujntil monday and there will be something else to push it one way or the next.

In all honesty its a straw man.

You need to look at the whole picture and if you did, IMO, you'd be on board with those who think something must be done....NOW.

Holy crap this is getting laughable. When will these crooks be made accountable?

SEC rethinks letting public see who's 'shorting' stocks | Money & Company | Los Angeles Times

Talk about another Great Depression is not some pie in the sky thing. Others have said it in this thread - our economic system is pretty messed up. Its really in many ways held together by duct tape. Yes, you can let things fail and everything shake out as it will - essentially trying to cleanse the system but in doing so you will have massive fallout and you and everyone you know will be affected in some way - whether its your job lost, jobs lost of family and friends, your salary slashed, prices being higher...IF our financial system fails how can you not expect some kind of major thing like another depression?

Go look at the balance sheet from some of our major companies. Ford has 22 billion in cash...and 166 billion in debt. Boeing has 7.4 billion in cash and 8.2 billion in debt. Alcoa - 815 million in cash, 8.7 billion in debt. Home Depot - 1.1 billion in cash with 11.7 billion in debt. McDonalds - 2.4 billion in cash, 11.1 billion in debt. Caterpillar - 478 million cash with 31 billion debt. Bank of America - 322 billion cash with 623 billion debt. Out of these companies that I just chose at random only Ford is not profitable and all of them have far less cash than debt.

The economy runs on credit. If you take the credit away you will bring the economy to a halt. When businesses shut down people lose their jobs and they can't support the 'good' businesses any longer forcing them to lay off people and the cycle continues. Will the world end? No. Some companies will exist but not enough to keep unemployment at any kind of level like it is now. That's not fear-mongering unless you can explain to me how the global economy will continue to function in at least a somewhat normal state if nobody is willing to lend money (or lend at reasonable rates).

The idea of a blank check is not a great one. The idea of paying some made up price for assets you have no idea what they are worth or if they even have value is even worse. But it is what is on the table and its better than doing nothing. It could end up good, it could end up as a complete waste of money but give us time to work on fixing what caused the mess in the first place and if nothing is done to correct the underlying problems it would be nothing more than wasting the money to delay future disaster.

I just don't buy the assumption that there's ZERO credit for ANYONE, FOREVER unless we pass THIS bill TODAY. Someone said earlier that there "might not be anything left to save" if we waited until today. We're talking what - 4-5 days?

That's how the fear-mongering is basically presented.

Somebody cited one example of one one company's issues with "tight credit". Where's the evidence of armageddon?

Quoting & revising to reflect new status as of about an hour ago.

The entire marketing department got it in the neck from the Exec. VP on down, as did all media planning/placement personnel (all outside contractors, like us), and all the creative department that designed the ads that ran.

FWIW, relevant to the direction this thread turned, the timing was virtually certain to be only coincidental to the current banking crisis, as the wheels for this had been in motion for quite a while (probably since before we were even brought on board).

It would be more applicable to the degree of ineptitude at the highest levels of large companies than to anything banking or housing related (i.e. they could be a widget company & still make the same mistakes). To wit, odd though it may seem, they intend to continue spending the same level on advertising ... except without paying anyone who has any knowledge or understanding of the subject on the payroll. The media expenditures are "marketing budget" which did not change or may actually increase over the next couple of months while all personnel costs related to advertising were labeled "overhead" and ordered to be slashed to the bone.

It was almost amusing this morning to realize that the few artists/creatives who weren't fired quit within minutes of getting the lowdown and that they now have over 40 print ads due from scratch in the next ten days with absolutely no one on hand to do them, particularly since that scenario didn't actually dawn on anyone involved in the decision process. It would have been more amusing if it weren't so sad an example of idiots making six & seven figure decisions.

Again, when did I say there would be ZERO credit for ANYONE FOREVER? I've never said there was ZERO credit TODAY even. Not a whole lot is different today than yesterday. I'm saying we're going to see massive changes if we see massive bank failures and if we see a credit freeze from the banks that still exist. Even if we were to go into another depression we would eventually come out of it like the country did before and the economy would grow then and everyone would be able to build up credit and all that kind of stuff but the period of time that took will be lengthy and painful for our country as a whole that is used to a much different lifestyle.

Go read about what's going on TODAY. Jobless claims are as high as they have been in 7 years at nearly 500,000. Banks are cutting their lending. Companies are slashing their economic forecasts left and right - that's not fear-mongering. It's real. TODAY there is still credit to businesses and individuals. If the parties giving that credit fail and go out of business then I don't know who's going to be giving the credit then. Maybe you can tell me that.

Like Flasch said - the market changes on a daily basis. Monday when the bill was defeated the market tanked and tanked hard. It would have likely continued to do so had there not been the statements from people in Congress that the bailout was not dead and that they would pass it this week. If the bill fails the House you will again see a dramatic selloff and destruction of wealth until either the market bottoms at some point (likely losing trillions of dollars along the way) or until some other force comes into play.

The longer you wait for something to happen the more people will pull their money from banks into something "safe" like T-bills and the more banks will fail and the less banks will be able to lend. That's the hurry. You can't operate businesses forever with the balance sheets these banks have.

Sorry to hear that Jon.

Here you go - here's an example of TODAY.

But everything that Gary cites still doesn't jive with a 'Great Depression' for me. Maybe i just need to adjust my concept of what a Great Depression is - I just never envisioned a Great Depression with so many channels available in HD.

No one has said there will be no credit. But it will likely be more expensive, and in some cases prohibitively expensive.

Do a google search for "overnight lending" or "repo rates."

We're not in a Great Depression now - not even close and I never said we were. Things are "ok" for the time being - there's alot of people out of work (especially here in Michigan) but hopefully it will not get worse. We may be in a recession but we're definitely not in a depression and I hope and pray we never are. I've said that it appears we're close to the financial system collapsing which then could lead to another depression. Frankly I don't understand what's hard to picture here. Banks have failed - major banks. WaMu was no mom and pop financial outfit. Neither were institutions like Bear and Lehman. What makes you think that the rest of the banks are going to survive this mess without help and if they can't then what happens? That's what I'm talking about - that's when I think you could see a depression.

Or sales of relatively expensive video games being a part of the landscape.

"My banker says regulators are forcing all banks to downgrade construction loans to sub-standard in my part of Florida. Perfect credit and a wonderful history do not matter."

That's a really good thing in this economy. As I and others said, the housing market absolutely needs to collapse. Sucks for guys in Florida whose living depends on it, but we shouldn't be forever subsidizing a industry so it can mantain it's boom levels forever, especially something as important as housing, which has become so unaffordable and so tied into our standard of living. Banks won't loan them money because they know that a good number of these contruction-type companies won't exist soon. That's OK. That's good, responsible banking. More of that and we wouldn't be in this mess. It isn't a tragedy that a bank doesn't want to loan money to a slumping business, it's a good thing. If these banks suddenly have the toxic assets off the books, are they suddenly going to deal with these doomed construction companies again? If they did, there will soon be more toxic assets to bailout. If they didn't - who are we trying to save again?

A housing market collapse will of course impact everything else in the economy. But that's where we are.

But are banks lending to anyone outside of the housing sector? It's McDonald's having trouble getting credit? That would worry me, depending on the scale. If there were zero banks left, ya, that'd be a problem. A problem probably beyond the scope of government intervention. Until there's zero banks, there's banks with an opportunity.

To be fair, most of those examples are in areas where we've know for literally YEARS that the real estate market was heavily overvalued. In the case of the business mentioned, they should be glad they were allowed to borrow against an inflated real estate value for as long as they did. The property estimates were out of line with reality. In the case of the lady lamenting the 20% rule, she should understand that the relaxation of loan calculations was what allowed those kinds of transactions in past years. It's never a given that loaning processes remain the same. Asking for 20% down is a common thing and it honestly should become the standard for the next few years. Opening up interest-heavy loans with little down was a big mistake.

In contrast, most of the cities where inflation of real estate value never occured are still seeing modest gains in value or at worst, their property values remain steady. My home value in KC has gone up 10% since I bought it in 2006. People need to realize that they have to adjust to a new way of spending and budgeting in these times.

Where do you think that companies in any other industry borrow money from?

Banks. Are they lending to anyone outside of the housing sector? Or is McDonald's frozen off too.

I guess your implication is that with zero banks, there's zero credit for anyone. I think we're far away from zero banks, or even a depression-level low number of banks.

I'm not saying that the bank should just be willing to continue the same poor practices that got them here in the first place - I was just referring to a story regarding what changes people are seeing now in the credit market that they weren't a short time ago.

Congress Approves $4 Billion For Bread, Circuses | The Onion - America's Finest News Source

(An oldie but still a goodie and applicable today)

SI

I asked this above but to emphasize the point, but wouldn't ANYTHING but frozen/tight credit to the housing sector be the "poor practices that got them there in the first place".

Right. And my point is that if people manage the change correctly, they will survive this whole thing and be just fine. People making really stupid decisions, both gov't and public in general, is what got us to this point. People need to realize that there's no shortcuts that don't come without an inherent risk that they should understand is present.

No, I doubt any major companies are frozen off at the moment and I don't want to see them be because then they will cease to operate. Credit may not only be not available in the future but could be at much higher rates instead which would still hurt a profitable business and would only make things worse for companies like Ford that are already plenty unprofitable and keep getting government help.

We are far away from zero banks or a low number of banks, right now. But play it out over time. All these toxic mortgages and investments caught up with places like WaMu and Wachovia - those things didn't go away. They're now part (at least in part) of JPMorgan and Citigroup. Bank of America bought Contrywide this year and that's chalk full of horrible mortgages and what about banks like National City, Sovreign, Regions, Fifth Third...if these things really are worth nothing like some are suggesting how do any of those banks end up surviving?

Please, I'd love to know how the banks will survive without help when they own so much stuff that is worthless and when they have less money to lend (thereby less chance to make money) because people pull their money from the banks because they're afraid the bank will fail. Look, if nobody had gone down but a couple of mom and pop institutions I don't think we're having this discussion. But we've had IndyMac, Lehman, Bear, WaMu all fail - we had Fannie and Freddie and AIG bailed out. We've had shotgun deals to sell Merril and Wachovia. We've had Goldman and Morgan Stanley change their banking structure. What makes you think that these other banks aren't going to eventually follow suit?

Standards need to change - absolutely, without a doubt but if the banks are going to make money they need to lend - they just need to be smarter in doing so and they need to have the resources to do it. It's hard to lend money if your balance sheet is full of worthless items and people are calling asking for their money to take from you. The question is do let the house collapse so you can rebuild it correctly (hopefully) or do you try to prop it up and then fix what's wrong with it.

If there is one thing I've learned from all this, the correct answer is to walk away from the house and let it be someone else's problem.

I keep hearing "do something, ANYTHING, now... TODAY!!!! EEEK!".

Everyone thinks this is a 750 billion dollar injection into the economy (or heck maybe more than that now, haven't read the latest bill)....

It is not. To disagree with the distinguished representative from California, they are not buying hard assets... an asset backed by a house, can easily be made worthless if it is a derivative. Heck, the simplest contract to demonstrate this is if the 'troubled asset' is a put to sell the house at 400,000 in 2010 and the market value is now 200,000 (and going to stay that way for the forseeable future).

You CANNOT EXERCISE THE PUT, it is worth zero and will be worth zero in 2010, at which point it expires. These derivatives under consideration are similarly complex... they are highly chopped up and hedged instruments that have value not tied directly to the underlying asset. If the value of the house goes from 200,000 to 300,000 the value of these assets may not go up by 50% like you would expect, it could go up more or less, or even go down if they have some very weird contract.

But lets say these silly contracts are tied to portions of value in the mortgage, even rebundled and divided up, that each contract is tied somehow to the value of a house. Given that the principle and the interest can be separated from each other, if a mortgage is reworked some of these contracts may no longer make sense whatsoever. Or may see drastic reduction in value, perhaps to zero based on the terms of what happens when a mortgage is refinanced (I'm sure they all have complicated clauses for when that happens since that is the point of an ARM right?).

We are not buying houses or land, that is my objection. Spend 700 billion dollars on acquiring property, and set aside a trust to distribute returns to anyone who has valid contracts on the mortgage. I would much rather trust the government to oversee awarding corporations their contract returns, because businesses will fight hard for every cent they can get so the government will not need to try hard to untangle these assets. I do not trust the government to buy troubled assets, and fight hard to actually sell them for some real value (the claim made by those saying it will only be 200 billion).

But back to the original point, 750 billion in troubled assets transfered to the government does not necessarilly resolve this crisis. Many banks could still have no liquidity because they are still over-extended. Or some places might use the 'cleaned' books to simply liquidate their company and run for the hills. Finally, some of these organizations might suddenly have a boost of fictional capital and invest it in some other scheme to make a quick buck (I'd like to dump all of my worst bets and keep my lucky ones, wouldn't you?). After it all, the stock market could just decide to panic anyway and wipe out another 1.2 trillion from the market anyway like Monday.

In the worst case, the inflation bubble goes out of control, and all of us with any savings of marginal value (say under a million), will get wiped out, while big money of course can maneavure to protect their billions, or survive inflation as mere millionaires in real dollars.

Everything I am saying is based on studying these particular assets in question, realizing a long time ago that they were bad, and when I finally had money to invest I bet against this foolishness and cleaned up (granted I'm 26 so I didn't have much capital to play with). I'm one of those evil shorters and speculators (except I play against the obvious bubble)... but I base it on the old fashioned research investors were supposed to have learned a long time ago. Look at the deal, read it, understand it, and realize that its not just a bad deal for taxpayers, an investment with terrible rate of return, but a potentially destabilizing shock for the real economy. Sure Wall Street may go up 400 after it passes, Wall Street lately has been all about the rollercoaster ride which is highly profitable if your lucky (like I have been recently) but is highly damaging if you are trying to invest for your life. I don't want to see 60 year old people getting wiped out, but they will still get wiped out if we waste all this money and the market still decides to flake out... and even worst we end up with inflation or bubble-nomics that tears apart what still works in our economy.


Overnight we suddenly did not get a shortage of food, or resources, or products, we have a shortage of sanity in our financial system. We need to triage it like a battlefield medic, go straight to the root problem (the valuable assets, even if they are in decline), and sew it up... not place a bucket under a bleeding wound and occaisonally bail it outside. [pun intended]


Also it would be nice to have companies transparent enough that I can go long in my portfolio more often. There may be a lot of bargins out there, but I can't begin to calculate their worth (and I don't buy what other people tell me to buy, do your legwork folks).

Aren't those the risks you take when you decide to open a small business? In the case of that turf company, for example, it's supply and demand. There is no more demand for what they are offering. Who's fault is that? The other example, oh no we can't get a loan to build, well, that means you shouldn't be trying to build, there is too much supply. Tough luck, you are in the wrong industry right now. Sure, these people (everybody?) will have to weather a severe financial storm... Like Ron Paul said, look to actual examples like Russia. They had to start over, and the people lived through a year of financial difficulties. Now, they have one of the strongest economies over the last 7 years.

Plus...those areas (i.e. Florida, where I live and hope to sell soon, gulp)...do not need increases in supply. Nearly the entire state is overbuilt for it's economy and population already. The last thing we need are new home loans.



Yeah...it's a real shame that speculative investing pretty much tanked some areas. I dont know how to fix or alleviate that, since the amount of real estate investors flooding the market was actually leading to a reverse panic (where many renters believed the prices of housing would continue going up beyond their means if they did not buy during the boom...and all things told, the "boom" values were still lower than many parts of the country).

It's a real issue if you live somewhere like Florida, California, Texas, etc. My sense of fairness says that the states need to handle the fallout of speculative investments internally through taxes, etc...but the realist in me sees the potential for 25% of the state to foreclose and make the problem even worse. I dont know...not a good time to own a home in those areas(unless you've owned for 8+ years).

Excellent advice for people interested in investing in anything and you make a lot of great points. I'm not necessarily in favor of the bailout but like I've said, I'm less in favor of massive bank failures. Maybe I'm missing something but I do believe that these "toxic" mortgages are worth nothing or close to it and I don't know how the banks are going to survive with them on their books. Is it possible? The problem I see is who else is going to buy the stuff? No private investor is going to pay for them if they don't know what they're worth and the banks don't know what they're worth if anything and if they could untangle them then why would the banks want to sell the "good" parts of them and be stuck with nothing but the bad?