The New Bailout Plan

[AFBlue]

I didn't see any thread that succinctly summarized the new bailout plan unveiled by Paulson just a few short weeks ago...and I thought I'd comment.

I'm absolutely livid at the prospect of partially nationalizing the banking industry by purchasing shares in banking institutions and infusing them with cash.

While I was also pretty skeptical at the first bailout proposal (buying up non-performing assets from certain banks) and didn't like the government putting taxpayer dollars on the line, at least I understood it.

1) Buying up toxic assets is the most effective way to improve credibility of a banking institution. Put simply, if a bank has $100M of assets and $25M are non-performing, the bank has little to no leverage in requesting a loan.

But, if the government buys up the non-performing assets, a lending instituion knows that while Bank X may only be worth $75M most of their assets are reliable.

2) There is actually a capitalistic strain to buying up non-performing assets and securities, because the government would be doing it at an extreme discount. If they waited for the market to stabilize, they could stand to make a nice profit.


BUT NOW....all Paulson wants to do is throw money at the problem. Just because Bank X now has $200M doesn't mean the risk has gone away for lenders. It just means the proposition of lending to Bank X is reduced. REDUCED! At a cost of $250B+ to the American taxpayer.

And why? Because the current situation "looks bad" and each day the market tumbles while Paulson sets up a committee to buy up the non-performing assets, the more political pressure is on him to act. So, he just abandoned the halfway decent idea for a terrible one.

And what's worse, I don't hear any outrage. He basically took the 400-page bill, set it down on the table in front of Congress, dropped his pants, and left a big steaming pile of poo on it. WTH!?!?!

Just wanted to let you guys know how I felt.

Alright...off the :soapbox:

[boutons_]

Paulsen is either a liar or incompetent, but very probably both. $350B of taxpayer wealth transferred to the financial sector that shows its gratitude by continuing to throw taxpayers into the street.

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http://www.alternet.org/images/site/logo.gif
The Dirty Secret of the Financial Crisis: Our Banking System's Broken

By William Greider, The Nation
Posted on November 22, 2008, Printed on November 22, 2008
http://www.alternet.org/story/108138/


Henry Paulson's $700 billion plan to save the world is dead or dying, but the bailout was not killed by his arrogance or his grossly misleading claims about what the public's money would buy. The plan collapsed because it didn't work. The Treasury secretary has launched a PR offensive to revive his falling influence. Too late. The Democrats should be equally embarrassed. In September their leaders in Congress rushed to embrace the Paulson solution, no hard questions asked. They now claim they were duped.

Paulson's squad at Treasury pumped $250 billion into the largest banks, buying their stock at inflated prices on the assumption it would persuade investors to step forward with their capital too. Instead, savvy financial players realized Paulson was spitting into a high wind, trying to save a system with stout talk.

Here is the ugly, unofficial truth that neither Wall Street nor the government will acknowledge: the pinnacle of the US financial system is broke -- with perhaps $2 trillion in rotten financial assets on the books. Nobody knows, exactly. The bankers won't say, and regulators won't ask, or at least don't dare tell the public. Official silence naturally feeds the conviction that banking's problems are far worse than we've been told. The Levy Economics Institute of Bard College puts it plainly: "It is probable that many and perhaps most financial institutions are insolvent today -- with a black hole of negative net worth that would swallow Paulson's entire $700 billion in one gulp."

The scale of this disaster explains why the Treasury secretary had to abandon his original plan to buy up failed mortgages and other bad assets from the banks. If government paid the true value for these nearly worthless assets, the banks would have to write down huge losses or, as Levy economists put it, "announce to the world that they are insolvent." On the other hand, if Paulson pumps the purchase price high enough to protect the banks from losses, $700 billion "will buy only a tiny fraction of the 'troubled' assets."

Paulson was trapped by these circumstances (and his own mendacity). Each time he tried to change the script, market insiders became even more alarmed. Congress is trapped too. So is President-elect Obama. From the outset of the crisis, the essential fallacy shared by governing influentials has been a wishful assumption that quick interventions with tons of public money would somehow restore the system to "normal" without disturbing free-market principles. Replenished banks would start lending again and lead us to recovery. "Normal" is not going to happen. If the new president does not break free of the denial and act decisively, his administration will be dangerously compromised from the start.

Obama can begin by declaring a "bank holiday" like FDR's in 1933 -- an opportunity to put the hard facts on the table and assume temporary control of the entire financial system. Nationalizing the banks sounds more radical than it is, since banking law already empowers regulators to impose extraordinary controls and close supervision over troubled institutions. Facing facts will be painful, but it's better than continuing a costly charade. Paulson's approach, endorsed by many Democrats, was designed to preserve oversized Wall Street titans. In fact, Paulson and the Federal Reserve are making things worse by creating new members of the privileged club of "too big to fail." Public money is being used to finance bank takeovers that will become new behemoths.

A genuine solution means closing down the hopeless institutions and creating a more democratic system based on small to medium-sized banks, financial intermediaries that are less imperious and closer to the real economy of producers and consumers. The Levy institute suggests that some banks are "too big to save." If the president-elect seeks an opinion quite different from his circle of orthodox advisers, he could start with the institute's tartly incisive analysis "Time to Bail Out: Alternatives to the Bush-Paulson Plan," by Dimitri Papadimitriou and Randall Wray. Their perspective is Keynesian, not market worship. They argue (as The Nation and others have) that the bailout is proceeding backward. Instead of saving Wall Street first, government should devote its heavy firepower to reviving jobs, incomes and business enterprises. The banks will not get well or begin normal lending until there is overall economic recovery.

The financial system, meanwhile, can be managed much as it was during the Depression, with regulators weeding out doomed banks and closing them, putting troubled banks under conservatorship and supervising healthy ones closely to prevent excesses. "If we are going to leave insolvent institutions open, it is critically important to replace or at least control management," the Levy paper explains. "Business as usual would be a disaster."

Under these conditions, the government can grant forbearance and prescribe business plans for a slower recovery of bank balance sheets. Instead of buying ruined assets from banks, the government can allow them to sit, possibly for several years, until the economy revives and mortgages or other debt paper regains value. This would amount to an "imposed purgatory" for major banks, keeping them from growing too fast with unsound ventures. Taxpayers will not get off the hook either; government will need to spend hundreds of billions to bail out bankrupt pension funds and pay off insured deposits at failed banks.

Economic stimulus requires preservative measures to stop the bleeding, like a moratorium on home foreclosures and federal lending to the auto industry, as well as force-feeding innovation. Like the financial sector, the reform imperatives must accompany any aid for troubled industries. Do not subsidize more bad behavior by corporate titans or assist companies shipping US jobs and production overseas. In Detroit's case, Washington better get it in writing -- an enforceable contract to recover our money if the auto industry doesn't deliver.

President-elect Obama, of course, cannot act directly on any of these matters before January 20. But the Democratic Congress can, since the Treasury cannot spend any of the next $350 billion in the bailout fund without Congressional approval. Congress's first task is to cut off Paulson's water. Representative Dennis Kucinich, as usual, is out front demanding that Congress reject Paulson's request in advance.

You can see why Wall Street hates these propositions. No more free money from Washington. No more "masters of the universe." You can also see why the people might be delighted.
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[AFBlue]

Wow boutons, I didn't think you had it in you....making a salient point without profanity-riddled nonsensical attacks.

Just kidding...but not really. :lol

One correction, Paulson said he'd only spend $290B and graciously leave the next Treasury secretary with $60B. How nice of him....:rolleyes

[Winehole23]

What I didn't like about the TARP to begin with is that the toxic risk that led to the insolvency of the whole financial sector would be transferred to the US balance sheet. It was bad enough that we nationalized half the mortgage sector; nationalizing the cost of the derivatives bubble on top was intolerable.

As it turns out, the original purpose of the TARP was rendered unnecessary by the Fed pawnshops (TAF, TSLF, PDCF) created in the wake of the Bear Stearns failure. We assumed the risk anyway. So far they have lent out $2 trillion. I think we can safely assume banks are using MBS's and other toxic crap as collateral, since the Fed won't disclose (http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY&refer=worldwide) who's borrowing, or what's being used as collateral.

Capitalizing banks isn't necessarily a bad idea, so long as we get a stake in the bank and management control. But the most important thing to do would be an RTC style audit sorting banks into good and bad before any help is extended. It makes no sense to try to rescue insolvent banks. Buy the good, liquidate the bad.

The only reason I can think of that this hasn't been done, is that there is an embarrassing number of bad banks. Or to put it another way, a very small number of good ones, who would end up owning the whole sector.

[AFBlue]

Capitalizing banks isn't necessarily a bad idea, so long as we get a stake in the bank and management control. But the most important thing to do would be an RTC style audit sorting banks into good and bad before any help is extended. It makes no sense to try to rescue insolvent banks. Buy the good, liquidate the bad.

This is the false logic I see applied to the purchase of shares in banks. Like the Government, and by extension the American people, have any say in the management decisions of the banks that borrow.

At the base of it, all the money does is encourage the banks to lend to one another, but to me it makes more logical sense to remove the toxic assets from the equation instead of reducing the risk by making the non-performing assets a smaller part of the equation.

Sure, it's alot more simple and expedient to throw money at the situation, but IMO....it's alot less effective.

[Wild Cobra]

Chavez must be proud of us following in his footsteps and taking control of large entities. Just add corporatism (http://en.wiktionary.org/wiki/corporatism) to the USA's responsibility.

Isn't corporatism an aspect of fascism?

[Winehole23]

This is the false logic I see applied to the purchase of shares in banks. Like the Government, and by extension the American people, have any say in the management decisions of the banks that borrow.Perhaps I should clarify. Suggesting that government be given the power to replace the management teams that ran the banking sector into the ground is not the same as direct government control, and neither is federal oversight of banks receiving aid.

We did this for the S&L bailout, even made a modest amount of of money at the end of it. Why is this so wrongheaded now?


At the base of it, all the money does is encourage the banks to lend to one another, but to me it makes more logical sense to remove the toxic assets from the equation instead of reducing the risk by making the non-performing assets a smaller part of the equation.Slightly disagree about non-performing assets. If the government would get out of the way private money could take advantage of this supposedly great opportunity. Price uncertainty can't be resolved until the government either shits or gets of the pot.

But the money is thrown down the toilet and encourages no one to lend, if the bank is insolvent to begin with.

The problem in banking and finance isn't liquidity. It's insolvency. There's too much debt, and not enough real wealth to support it.

The five trillion and counting we've thrown at the problem hasn't unfrozen credit. What amount do you suppose would? A trillion here, a trillion there, and pretty soon we're talking about serious money.


Sure, it's alot more simple and expedient to throw money at the situation, but IMO....it's alot less effective.I don't think that's what I've suggested.

Are you familiar with how Sweden saved it's overleveraged banks (http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?_r=1) after an asset megabubble?

[Winehole23]

Chavez must be proud of us following in his footsteps and taking control of large entities. Just add corporatism (http://en.wiktionary.org/wiki/corporatism) to the USA's responsibility.

Isn't corporatism an aspect of fascism?The irony of GWB presiding over our conversion to a mixed, Chinese-style economic system, would be exquisite if it weren't so horrifying.

Put this together with the regal discretion claimed by the President in the GWOT, and what do you have?

On Inauguration Day Barack Obama will be the most powerful US president ever. I guess that's one thing we can all thank GWB for.

I disagree that our direction is Venezuela, though. Euro-zone social democracy seems closer to the mark IMO.

[boutons_]

US will not go so far as Euro social democracy. The capitalists and corps and finance sector will buy enough politicans to block it so the buyers can continue their predations and concentration of wealth ripped from the pockets of the Real Economy people.

There will be a charade of a swing back to more regulation of the financial sector, but it will only be a charade. eg, Glass-Steagal won't be coming back, regulation of private equity won't happen.

[Winehole23]

US will not go so far as Euro social democracy. We're already part way there, but you could be right. I certainly haven't gotten rich yet predicting the future, and I don't plan to start now.


The capitalists and corps and finance sector will buy enough politicans to block it so the buyers can continue their predations and concentration of wealth ripped from the pockets of the Real Economy people.That's been the pattern (http://en.wikipedia.org/wiki/Austrian_Business_Cycle_Theory), hasn't it?


There will be a charade of a swing back to more regulation of the financial sector, but it will only be a charade. eg, Glass-Steagal won't be coming back, regulation of private equity won't happen.We'll see. A deep, prolonged recession could change some attitudes about regulation and also about distributive justice. We may not be so far away from Eurozone-style socialism as you think.

[AFBlue]

Chavez must be proud of us following in his footsteps and taking control of large entities. Just add corporatism (http://en.wiktionary.org/wiki/corporatism) to the USA's responsibility.

Isn't corporatism an aspect of fascism?

Federalizing the loss, but privatizing the gain....yeah I'd say fascism fits pretty well.

[AFBlue]

Perhaps I should clarify. Suggesting that government be given the power to replace the management teams that ran the banking sector into the ground is not the same as direct government control, and neither is federal oversight of banks receiving aid.

We did this for the S&L bailout, even made a modest amount of of money at the end of it. Why is this so wrongheaded now?

Slightly disagree about non-performing assets. If the government would get out of the way private money could take advantage of this supposedly great opportunity. Price uncertainty can't be resolved until the government either shits or gets of the pot.

But the money is thrown down the toilet and encourages no one to lend, if the bank is insolvent to begin with.

The problem in banking and finance isn't liquidity. It's insolvency. There's too much debt, and not enough real wealth to support it.

The five trillion and counting we've thrown at the problem hasn't unfrozen credit. What amount do you suppose would? A trillion here, a trillion there, and pretty soon we're talking about serious money.

I don't think that's what I've suggested.

Are you familiar with how Sweden saved it's overleveraged banks (http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?_r=1) after an asset megabubble?

I'm not sure what you're advocating at this point. You seem to make a case against any government involvement...so why dispute my claim that they've gone too far at this point?

This country doesn't run on "real wealth". If it did we wouldn't be the preeminent superpower. We run on credit, and when the credit we lend against is perceived to be bad or actually is bad, there is no credibility. So, increasing confidence in the credit the banks do have should create confidence in the lending institution of the receiving bank's ability to pay.

And for the record, I actually think the best way to go is increased/revised regulation with no expense to the taxpayer. But, if there is a monetary role for government, I would like it to be well thought out and absent motivation for political expediency.

[Winehole23]

I'm not sure what you're advocating at this point. You seem to make a case against any government involvement...so why dispute my claim that they've gone too far at this point?I disagreed that government redemption of "non-performing assets" was a better idea than bank capitalization. That doesn't mean I'm for either one, but the capitalization idea at least worked in Sweden. Is there any historical or technical support for the MBS redemption idea you seem to prefer?


This country doesn't run on "real wealth". If it did we wouldn't be the preeminent superpower. We run on credit, and when the credit we lend against is perceived to be bad or actually is bad, there is no credibility. So, increasing confidence in the credit the banks do have should create confidence in the lending institution of the receiving bank's ability to pay.Wouldn't the quickest way to do this be to let insolvent banks fail? Or is the problem that they're all insolvent?

And if this is the case, isn't our preeminence as a superpower built on an economic house of cards? How that's a good idea I fail to see.

In the long view the emergence and endurance of American power was founded on sound money, manufacturing and thrift. The threat to the system has always been the excessive growth of credit. Calling credit the basis of wealth and power is one sided. The "great moderation" inaugurated by the so-called "New Economy" has turned out to be a painful lesson on the insecurity of security.

The wealth credit expansion made possible is ultimately illusory, since the result is depression, a global loss of confidence in the American creditworthiness and, very likely, a broken monetary system. US default may not be in the picture yet, but it is a dark cloud on the horizon. At no other time in our history has this been true. And this is a direct result of overleveraged finance.


And for the record, I actually think the best way to go is increased/revised regulation with no expense to the taxpayer. But, if there is a monetary role for government, I would like it to be well thought out and absent motivation for political expediency.Agree 100%. But I think conflict of interest enters in as soon as capital is allocated politically, rather than by the market.

[Wild Cobra]

Federalizing the loss, but privatizing the gain....yeah I'd say fascism fits pretty well.

That may be the intent of people thinking they are doing right, but with the congress and president we will have starting January next year, think that's what they will do? I think they will maintain and grow the increased control they can exercise over the free market. How long can the free market survive?

[Winehole23]

How long can the free market survive?It's already dead. But maybe they can zombie-fy it for awhile.