naked capitalism

Anonymous says:

What do you folks think of this plan from Hussman?

An Open Letter to the U.S. Congress Regarding the Current Financial Crisis

http://www.hussmanfunds.com/wmc/wmc080922.htm

Anonymous says:

Buyer beware in linking to James Surowiecki. He plays fast and loose with facts — and is prone to a sophmoric game of finding some way — ANY WAY — to demonstrate that he sees things uniquely, regardless of how superficial or supercilious the reasoning.

In April of 2007, for example, he twisted facts in support of blaming borrowers for their own troubles while also warning strongly against those who would go too far in regulating subprime.

Now we are treated to yet another irrelevancy dressed up as insight. Note well, for example, that in an entire article, he fails to mention once the issue of deregulation/no regulation. Not once.

And, he thinks he’s so clever in writing:

“when in fact becoming a public company makes caution more important”

Actually, James, the entire history of Wall St demonstrates that staying private makes caution more important: it’s your money.

Anonymous says:

“The 10 most bungled robberies ever”

I’d say we’re in the final stages of number 1 on that list.

Anonymous says:

“A simple alternative to unchecked Treasury power and moral hazard”

Congress is now considering a plan that would bestow upon the Treasury secretary, an unelected official, $700bn of taxpayer money and near monarchical power to spend it. Specifically, the Treasury is asking for authority to buy any financial assets that the Treasury secretary deems necessary to stabilize financial markets. Additional wide-ranging powers are also being sought, including complete discretion to award contracts to private companies in connection with the financial services industry bailout. The most egregious proposal, however, is that any action taken under the program be shielded from judicial review.

The government argues that we must abandon the fundamental principles of both our political system and our free-market economy to prevent a financial catastrophe. Proponents of the plan warn that an economic downturn not seen since the Great Depression will unfold if no action is taken. Ignoring that the United States emerged from the 1930s Depression and thrived, let’s accept for the sake of argument that a taxpayer-funded bailout of Wall Street is needed to avert financial armageddon. That still does not explain why a plan could not be structured in a way that preserves the integrity of our political and economic systems.

In terms of our political system, the proposal spits on the Constitution and its principle of checks and balances. There is no excuse for wantonly seeking to protect the Treasury’s actions from review by the courts. It’s bad enough that taxpayers fund a private industry bailout, but it is ludicrous that the government wants to remove our ability to hold anyone accountable in the event that any funds are inappropriately spent. This provision should be scrapped.

With regard to our free-market economy, the Treasury has wrongly concluded that embracing moral hazard (i.e. amplifying risk-taking by removing the consequences of mistakes) is the only alternative to allowing “too big to fail” companies to fail. Under the plan, taxpayers will buy distressed assets from financial firms. If it subsequently turns out that the sale price was too high, only taxpayers will lose – the private companies never have to look back. This should be the other way around. Taxpayers should be guaranteed the return, with interest, of the funds they are contributing to the bailout, while the financial firms that benefit from the program should be responsible for potential losses.

I know the premise of the bailout is that financial firms currently can’t bear even the uncertainty surrounding the future value of their risky assets, let alone actual losses. Yet why is it inconceivable that financial firms repay what bailout assistance they receive in the long term, when the economy is growing healthily again and profits are strong. Here’s one idea of how this could work:

* If an individual company sells taxpayers assets that later produce a loss, that company will be responsible for covering the losses. The repayment period will start after the company returns to profitability and be stretched out sufficiently so as to be manageable. Payments could be funded by temporarily reducing shareholder dividends and executive pay.

* If an individual company sells taxpayers assets that subsequently yield a gain, then that company will be entitled to the proceeds after deducting the initial taxpayer investment, plus interest and expenses.

* For companies that fail after receiving bailout aid, the assets purchased from them will be pooled and a net gain or loss will be calculated. Surviving financial firms that received bailout assistance will, as above, be charged (credited) for the net loss (gain).

If financial firms are bullish on the long-term prospects for the US economy, they have no reason to fear heavy future liabilities under this scheme.

In response to suggestions that executive compensation be capped at firms benefiting from the bailout, Paulson said: “In order to have this program work, we don’t want to make it punitive.” Come again? Is he forgetting that the plan is already punitive in that taxpayers would foot the bill to rescue financial firms from their own mistakes. Moreover, asking for something in return from companies that receive government aid is not punitive, it’s called fair.

In a sense, financial firms are blackmailing the US, saying: “If you don’t provide us with aid that is absolutely free of even reasonable conditions, we won’t participate in the program and risk widespread insolvencies that would sink the US economy.” To which Paulson is responding: “OK, I’m with you. I’ll fight to make sure you don’t have to reciprocate anything in return for the rescue.” The US taxpayers deserve a Treasury secretary with more backbone.

(Note: The suggested cap on executive pay at firms that receive government assistance is only a baby-step toward taxpayer protection. Even if CEOs receive pay cuts, the difference would be re-circulated within the company, not returned to taxpayers.)

Ironically, banks’ approach to home-mortgage modifications and personal bankruptcies implies that they should support a bailout plan in which they own up to responsibility for their losses. Lenders favor extending repayment periods for struggling homeowners rather than reducing principal balances. Banking industry lobby groups have fought hard to keep bankruptcy courts from gaining the authority to lower the amounts owed on home mortgages. And in many cases where lenders have voluntarily reduced the principal balance on a home loan, the lenders have retained a claim on profits if the property is sold at a higher price in the future.

Similarly, banking lobby pressure has led to significant tightening in US personal bankruptcy laws. In particular, it has become much more difficult in personal insolvencies for an individual’s debts to be written off. Clearly this industry frowns on people simply walking away from their obligations.

One last point: In addition to buying assets from financial firms, the Treasury wants to turn around and hire financial firms to, among other things, manage the assets acquired. In other words, private companies will get paid to oversee the losses that taxpayers are assuming on their behalf. This provision takes the bailout plan from being unfair to being obscene.

I’m actually in a minority of people who think a taxpayer-funded bailout of the financial services industry will do more harm than good. But even assuming one is necessary, clearly a bailout ought to be structured more justly than the Treasury’s proposal.

N. Nunez