New Bailout Proposal Costs Estimated at $500 Billion to $1 Trillion

Repeat after me: bye bye the US’s AAA rating and the dollar. Although the Paulson’s plan is only sketchy, on the surface, it is utterly ridiculous. The authorities propose to save the economy by buying mortgage paper at market prices.

Why do we need the government to create a massive and costly effort to buy paper at market prices? Institutions can sell paper at market prices now. This is clearly ether a massive game of smoke and mirrors (f we are lucky) or a plan to buy bad assets at above market prices but somehow pretend that they are indeed correct.

The latter takes us straight down the Japan path. The government is left holding lousy paper it will have to dispose of at a loss, the banking system gets subsidized not based on triage, on who might it make most sense to rescue, but who gets enough of the crappy assets sold at a high enough price. It’s a terrible, inefficient way to recapitalize the banking system. Why should taxpayers underwrite banks without getting some upside and a measure of control?

And as we have said before, Japan had high enough savings that it could manage its crisis internally. We don’t. Foreign central banks are already coming under pressure from domestic constituencies over their dollar holdings. It isn’t at all clear that they will support these initiatives by buying even larger amounts of Treasuries.

Oh, PS, and who gets to decide if the mortgage prices are fair? Consultants hired by the Treasury. Given how costly and ineffective this Administration’s outsourcing has been, I have little faith that this would be implemented well separate and apart from the confused (or more likely misrepresented) objectives.

And the prospect of turning on the spigot has others clamoring for bailouts. There are calls for underwater homeowners to get handouts too.

Pray that this measure does not pass, or better yet, call your Congressman and Senator and raise hell. The importance of these initiatives and the dollars attached says they should not be rushed through in a panic, particularly when the underlying premise is so dubious.

From the New York Times:

The Bush administration, moving to prevent an economic cataclysm, urged Congress on Friday to grant it far-reaching emergency powers to buy hundreds of billions of dollars in distressed mortgages despite many unknowns about how the plan would work.

Henry M. Paulson Jr., the Treasury secretary, made it clear that the upfront cost of the rescue proposal could easily be $500 billion, and outside experts predicted that it could reach $1 trillion.

The outlines of the plan, described in conference calls to lawmakers on Friday, include buying assets only from United States financial institutions — but not hedge funds — and hiring outside advisers who would work for the Treasury, rather than creating a separate agency. Democratic leaders immediately pledged to work closely with Mr. Paulson to pass a plan in the next week, but they also demanded that the measure include relief for deeply indebted homeowners, not just for banks and Wall Street firms.

However, it is not clear that Congress is going to roll over:

As of Friday evening, Mr. Paulson had yet to deliver a formal plan to Congress. House and Senate leaders pledged to work through the weekend, but they insisted that Mr. Paulson bring them a detailed plan rather than just an outline.

An even bigger obstacle was the goal of the plan. President Bush and Mr. Paulson made it clear that their primary, and perhaps only, goal was to stabilize the financial markets by removing hundreds of billions of dollars in “illiquid assets” from the balance sheets of banks and financial institutions….

But Democratic lawmakers insisted that any plan would also have to provide relief to millions of families that were poised to lose their homes to foreclosure.

The House Speaker, Nancy Pelosi of California, said she would insist that the plan “uphold key principles — insulating Main Street from Wall Street and keeping people in their homes by reducing mortgage foreclosures.”

The Wall Street Journal discussed the need to sort out pricing:

However, the government may find itself in a quandary: Does it pay more than fair-market value for hard-to-assess distressed assets, putting taxpayers on the hook for any losses? Or does it drive a hard bargain, buying for pennies on the dollar? The latter approach would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets. The Treasury department, which hasn’t commented on specifics about the plan, is expected to propose issuing debt in $50 billion tranches to fund the purchases.

The SIV rescue plan, the MLEC, did not get off the ground because the objectives of the sellers of bad mortgage debt, did not want to show much in the way of losses, while investors in the Entity, as it was called by some, were only interested in bying fairly-valued assets.

Since ideas along those lines haven’t worked, we are now having the taxpayer stand in place of private buyers. And I guarnatee if this program sees the light of day, it will not pay arm’s length prices. There’d be no point in doing that. This is a complete charade. But Paulson cannot say that this amounts to a recapitalization of banks, done in a very inefficient fashion. It would be too controversial to admit that. But Congress may figure it out regardless.

The New York Times’ Joe Nocera, in “A Hail Mary Pass, but No Receiver in the End Zone” takes a very dim view of recent Treasury moves, including the latest bailout plan. The whole piece is very much worth reading, Key bits:

So rather than help solve the crisis, the Treasury Department has actually contributed to the biggest problem in the market right now: an utter lack of confidence….

Will this latest round of proposals end the crisis? I know the stock market reacted joyously on Friday, but I’m not hopeful. One solution being promoted by the Securities and Exchange Commission — to make life more difficult for short sellers — is a shameful sideshow. A second solution, which Mr. Paulson announced Friday morning, requires money market funds to create an insurance pool to cover themselves against losses.

That may provide comfort to investors who equate money funds with savings accounts, but it is fraught with moral hazard.

And the third solution — the big megillah — is Mr. Paulson’s plan to create a new government mechanism to buy mortgage-backed securities from big banks and investment houses. Once they are off those companies’ books, life can return to normal — or so Mr. Paulson hopes.

He acknowledged that it would likely cost taxpayers “hundreds of billions of dollars.” I think it will cost more than $1 trillion.

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86 comments

  1. Dean

    Since there is wide consensus that the root cause of the current financial crisis are declining housing values, allow me then to use some real estate terminology to express my view as to the proposed remedy:

    Inflation, Inflation, Inflation.

    P.S. 3 or More Trillion will be the final cost.

  2. Anonymous

    Short selling and mark to market makes for a negative feedback loop. It rewards the short sellers and destroys anyone trying o put a stop to it.

    Take you your pick, don’t mark assets to markets ( and then what do you do), or ban short selling, or a least add a little risk to the short selling game, the uptick rule is an example.

  3. Anonymous

    Why do I have this nauseating déjà vu feeling that we’re seeing an echo of the Federal government’s disastrous mistake in 1930 of constricting the money supply rather than loosening it. The punishment of short-sellers and the plan to purchase “bad” paper — paper, mind you, not buildings or anything tangible — whose value no one really knows clearly aren’t solutions, they’re just gestures to show Main St. that the government is “doing something”. Now after failing to do anything to save Lehman — despite the warnings of Europeans and other people we will need to help us out of this mess — the government (read: Paulson and Bernanke) decide to throw whatever’s handy at the problem, namely the US taxpayers. And speaking of the US government, how anyone could vote to keep the party in power that brought us this mess is clearly beyond me. Our Fearless Leader is finally exposed — caught dumbfounded, his utter lack of curiosity now come back to bite us all — and when he can work up the courage to speak from behind the curtain, it’s with more of the inarticulate blather we’ve become all too inured to. God help us all, because not many other people are going to, and it’s not even clear we can help ourselves at this point.

    Will our foreign investors feel moved to help us out of pity? Fat chance.

    Yves, you’re to be commended for narrating this horrible train wreck in not-so-slow motion. It’s gut-wrenching, but you’re the first source I turn to these days. Bonne continuation.

  4. Cash Mundy

    I don’t claim to understand this stuff, but it seems that the present plan is sort of like getting to have your cake and eat it to, except in reverse: people like our friend Earl get to lose their houses and pay for them too! I’m sure Earl should be happy about that, but I don’t know how to explain it to him, which is why I don’t have a government job.

    Or they bail out the housing market. How does that work? Limited to owner-occupied, up to a max value of $500K or something? What about the people who already lost their houses? What about the renters who knew they couldn’t afford a house but will pay for all of this in taxes?

    Wait, now, I forgot: the Chinese will pay for it all. Gotta love them Chinese. Great food, nice people, give us just about everything we buy for next to nothing, and lend us the money to buy it with, too! And now they will even pay for our houses and banks, and maybe another war or two, too.

    What would we do without China? Let’s hope we don’t ever have to find out.

  5. Tom Lindmark

    Thank you for an excellent column. I have refrained from commenting here-though I do link to you- since our little dust up. But you really hit the nail on the head so I had to pat you on the back. You are right, it’s nothing more than a recapitalization with a bailout of homeowners thrown in.

  6. Richard Kline

    Just call it the Bogus Asset Regurgitation Facility, or BARF for distribution, as the financial economy vomits its indigestible 'winnings' of but quarters past back in the face of the public before expiring. Paulson's putting a phony number on this is just to get the Congressfactor's to hold still while they shakily sign the blank check. I mean, they understand 'billions and billions,' not that anyone has the least idea regarding what an unconditional purchase by the public authorities might look like. I respect Ken Rogoff's numbers, and in real terms _as of now_ they are likely a good back of the laptop figure. But as soon as we put one kind of bailout in place, any and every body with exposure will look for a way to get themself vested, or scream for expansion. That's what we are seeing now, Paulson & Co. running around 'guaranteeing' everything, not that they have the revenue streams to make good on any of that.

    This approach screams, literally screams "DEFAULT," because however sensible any one such guarantee may be in aggregate we don't have the dough, and aren't going to get it from overseas, either. So if Congress is fool enough to vote for these upfront, they have just killed our currency and sovereign debt a few quarters on, rather like the hapless homebuyers taking out an ARM on a home ten times their annual income 'because the opportunity is there.'

    —And what REALLY bothers me about all these actions is that we have had fourteen months to get in place a disaster plan which would allow for closure of bad bank-like firms, asset strip outs for _gradual_ liquidation by the public, and a controlled build-down of phony asset values. And for fourteen months the same clowns who are ralphing up 'plans' and 'guarantees' and the same legislators who are 'surprised' at scale of the 'risks' did sod all while hoping that dead pigs would fly. And we see again that denial is the shortest path between where one stands and utter ruin. Fourteen months of hum a few bars and we'll fake it, leads to panic bills with disastrous consequences just before all our elected officials expected to collect their contracts for the next few years at the ballot box. I'm ashamed to be represented by just about any of them.

    . . . But the outcome will be inflationary more than not.

  7. Richard Kline

    I knew, knew, KNEW that this proposal would suggest _market price_ purchases; incomprehensibly disgusting, but certain to come from Hank and Bush. Why?: Because if the Guvmint doesn’t pay market, all their pals are insolvent. And we can’t let THAT happen, can we??? I don’t mean that in a conspiracy sense; this is just what these guys have demonstrated they really think, that the government is a Piggish bank to be shaken down for those in a position to do so.

    Where’s a mutinous army when you really need one? Other than killing peasants on the other side of the world for minding their own business? Well, they won’t come home until their paychecks bounce. Along about Winter 09, mayhap.

  8. Dick Durata

    If you’re right that Congress will actually look at and discuss this ‘plan’ before approving it, I’ll be stunned. If they don’t pass it, we’ll have passed on to another, better, dimension.

  9. a

    “So if Congress is fool enough to vote for these upfront, they have just killed our currency and sovereign debt a few quarters on, rather like the hapless homebuyers taking out an ARM on a home ten times their annual income ‘because the opportunity is there.”

    Exactly. And Paulson and Bernanke are like losing gamblers in Las Vegas, who are down to playing double or nothing. The only problem is that the chips that they have now put in the kitty read, “U.S.A.”

  10. Anonymous

    1. It’s a fat advisory contract, probably continue for a decade or two. Sort of like KBR’s gravy train at DoD.

    2. Whatever Paulsen does now, double or triple the folly in the next Administration, if there is one.

    3. The remark was made elsewhere that our economy is standing on a pinhead and we’re more vulnerable than ever to a terrorist attack. Or a proxy vote. I think it goes downhill from here on the principle that we profit when govt does nothing. Not an option.

  11. mmckinl

    Excellent points, however you must propose something to get banks to do business with one another again. On Thursday the banking system just about froze up. Bond markets are dead, Munis are the walking dead and without the intervention Money Market Funds would have been next.

    I my opinion there will have to be some sort of intervention. The trick is to get the tax payer off a lightly as possible. I would propose a bank at the Treasury that created credit without borrowing. This bank would nationalize all banks and force them to do business and force them to unload or unwind derivatives. In this way no new debt is created and the banking system continues working. Any thing left over after tax payer reimbursement would be paid to shareholders.

  12. Anonymous

    Do you think they have many other choices at this point? The financial system is days away from complete meltdown. Do you want that to happen? I am sure whatever they are doing now is a complete last resort. We cannot risk a financial collapse and the deflationary consequences. Now when we are a debtor nation. Inflate or die at this point. Otherwise it will be bankruptcy for everyone. Please see the 1930s. I think the 1970s were a better time all around.

  13. Anonymous

    I do find it consistent that this administration chooses an inefficient policy rather than admit something controversial. I do not like partisan politics, and I generally eschew from commenting directly on the strategies of politicians (for I feel they are all forced to lie to their various constituencies), but the subterfuge (and the refusal to ever admit anything at any time) that seems to follow the current administration since the first days of Bush and Rove’s 2000 campaign is simply at level never before witnessed. It was a brilliant political strategy, no doubt. It appears, however, to be an example of a political “market failure” for all of us.

  14. Anonymous

    I think our choices are very limited at this point. Many would say that the danger of doing too little is worse than the danger of doing too much. I’m not sure. We still, even now, instinctively want to kick the can down the road. The US has been consuming far more than it has been producing for a long time, and anyone but a child can see that this is unsustainable. The process from our current state of overconsumption to a sustainable state will be very, very painful. Who in the public has admitted this? Has any Democrat? Any Republican? More than a handful? There is going to be pain, make no mistake. I’m not sure we shouldn’t just take our medicine now and grit our way through it. I don’t think anyone else is really sure either. If anyone tells you they are sure about what course we should take, I’m pretty confident that you should not trust this person on any important matter ever.

    I do doubt that any of these treatments are going to work because they do not appear to address the root of the problem (overconsumption). I guess we’ll find out.

  15. Anonymous

    I know that Paulson supposedly divested from financials upon taking the post at Treas, but does anyone have a source to find out where his hundreds of millions are invested? I cannot believe that his panic this week was not at least colored by the thought of his grandchildren’s fortune being swept away into nothingness.

  16. alan von altendorf

    Gennuinely tired of hearing how important government do something, nationalize all the banks, force people to trade, buy up worthless paper, inflate and debase — and then what? Public works projects, a mission to Mars, another war?

    Please consider the obvious. No one wants to trade? Fine. They go on a expense account diet until some genuis decides to mark to market. Downsize. Merge if you have to and you get a tempting offer. Capitalism 101.

    Believe it or not, the private sector can turn this around simply by refusing a Paulson bail-out and likewise sidestepping the ban on shorts and puts. Set up a platform in Dubai, or go into voluntary chapter 11 reorg.

    Whatever hope America has rightly belongs to a free people, not a bunch of obedient pansies lined up for free lunch.

  17. rootless cosmopolitan

    "Why do we need the government to create a massive and costly effort to buy paper at market prices? Institutions can sell paper at market prices now. This is clearly ether a massive game of smoke and mirrors (f we are lucky) or a plan to buy bad assets at above market prices but somehow pretend that they are indeed correct."

    Yves, can institutions really trade these papers at market prices? Perhaps, there isn't any market at all right now for many of these papers, because everyone is just afraid to do business. Maybe we shouldn't try to find a hidden agenda, just try to find out at first, what really is?

    What happened this week? I have got the impression there is outright panic on government level and the Fed going on. No hidden agenda, but pure panic. Something caused it. I don't have the insight, thus I only could be speculating. But maybe there are some people here who work in the finance industries with insight who know more what happened this week in the markets? Beside the obvious that stock markets went into free fall and credit spreads went through the roof. But what else? The threat of a massive run on money markets and banks and a massive domino collapsing of financial firms? Or what? Anyone?

    The next question is, of course, how is this buying of last resort by the Treasury is supposed to work and is it really going to work? There is an article at Bloomberg:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aB_rf1rurtio&refer=home

    According to this the plan outlines to do reversed auctions to buy the toxic stuff as cheap as possible. But if there isn't a market for these papers right now, and these auctions put a price tag on these papers, won't this make things even worse for the financial institutions concerned, because they will have to mark those papers to market forcing another wave of write downs and realization of losses, and let bank capital written in the books fall below required limits? Thus, maybe the whole plan implemented will even trigger a wave of bankruptcies as unintended consequence. The opposite of what it is supposed to achieve.

    I am afraid the whole euphoria of the last couple of days around the world, at least among market participants, that things are going to be resolved from now on is way premature.

    These are just some thoughts of a layman from my side. What do you think?

    rc

  18. Anonymous

    Paulson & co. are present day Robbinhood and his gang looting poor tax payer and enriching…………..

  19. Anonymous

    I think Paulson/Bernanke are risking capital flight from the US, by increasing perceived political risk that the government will destroy US investments through inflation and taxes.

    If Paulson/Bernanke pursue policies that are reckless enough, they’ll risk a brain drain of talented people leaving the country for more opportunities outside the country.

    Paulson/Bernanke/Cox should all be fired. They are hurting this country.

  20. Abbot_Of_Iona

    Controlled Demolition Bailout

    Marvellous coverage as usual Yves .

    Maybe I can add my tuppence worth as an outsider (not involved in the markets)

    I could way off the mark here. But bailing out the Banks & Wall Street;

    Will not revitalise the housing market.

    Will not simulate consumer spending.

    Will not increase Government Revenue.

    However, given what Dodd said (Chairman of the Banking, Housing and Urban Affairs Committee!!!) as reported by NYT

    “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

    And what Schumer said

    “It’s a brave new world. You are in uncharted territory, but the one thing you do know is you can’t leave them (credit lines) frozen or the economy will just head south at a rapid rate.”

    And given that short selling is banned, it seems to me that rather than have a meltdown Paulson has decided to go for controlled demolition.

    If an institution does not come forward with a true statement of its position by the end of the ban on short selling (2nd October??) they will not be allowed avail of the bailout.

    If they do come forward the shareholders (and possibly bondholders) will get hammered.

    Then, when all the chips are on the table Paulson & Bernanke & Bair consolidate the financial system at breakneck speed.

    No one gets a chance to short the information and when all is said and done there are 500 / 1000 less banks and the $1T is used to recapitalise the remainder.

    The remaining banks will have restricted lending parameters.

    The USA enters a decade of pain.

  21. Juan Cristobal Federico Chihuahua de la Vega

    Yves,
    Could we have some specifics, please? All we hear are warnings of “a total meltdown”, “a financial cataclysm”, but exactly does that mean? In no quotes from the meeting with Congress, and in no quotes I’ve seen so far are the consequences of non doing these bailouts specified.

  22. Anonymous

    “Repeat after me: bye bye the US’s AAA rating and the dollar.”

    Okay, Yves: Bye-bye AAA rating! Bye-bye dollar!

    In fact, I was just ranting to my wife last night that the dollar is over, finished, done for. A few decades hence, it will be a second-rank currency like the British pound: the shrunken scrip of a former empire.

    Paulson’s plan amounts to soaking the middle class to pay for the errors of plutocratic investment bankers. This ought to fuel unprecedented populist rage. Of the two candidates, McCain has picked up on this better than Obama. But neither of them is doing what Huey Long would have done: make the FIRE sector pay for its own bailout by taxing them to their knees, after raking them over the fiery coals of Congressional hearings and then convicting the ringleaders.

    From the Democratic party comes the familiar refrain of bipartisan compromise: when the two parties have different spending priorities, the “compromise” is to fund ALL of them. After all, the third-party payers (that would be you and me) aren’t represented at the table.

    What fundamentally made the rich First World different from the poor Third World is rule of law, versus rule by decree. In response to the financial crisis, the U.S. has resorted to rule by decree. Thus, the dollar is now a Third World currency. Throw in some Second World, USSR-style falsification of economic statistics, and you’ve got one ugly, stinking brew on your hands.

    “America Number One!” — a slogan as antique as “Fifty-Four Forty or Fight.”

  23. Anonymous

    Anon at 2:55 asks, “Do you think we have any other choice at this point?”

    This question/perspective is THE conventional wisdom permeating every step proposed/taken by The Republican National Socialist Party currently led by Paulson, Bernanke, Bush and McCain.

    It is nothing more nor less than 9/11 redux. Sadaam was behind the attacks on the Towers. We must have regime change. We must eliminate the Tyrant. And we must do it NOW. Because, “do you think we have any other choice at this point?”

    One of the many hallmarks of Republican National Socialism is the blended use of fear and lies — but not just little fears and ‘fibs’. BIG, honking fears and huge, outsized lies.

    Do we have any other choice at this point?

    Well, actually, yes.

    Some possibilities can be read daily in comments at Yves’ wonderful blog.

    It is simply too easy and too predictable after the 30 year build up of Republican National Socialism, though, for the Republican National Socialists and their party acolytes in the business and media spheres to trot out the BIG LIE/BE VERY AFRAID blend. “Do we have any other choice at this point?” Well, absolutely NO! Because if all of you don’t get in line behind this bailout or that nationalization, this diktat to cease short selling and that ka-billion dollar guarantee of money markets, this suspension of accounting rules and that purchase at any price of worthless assets – well, then, the entire financial and economic system as we know it will disintegrate before our very eyes and all of you — every family, every person, every man, woman and child will instantaneously be impoverished and destitute. All of you. All of the tens of millions of American households who, after all, have all or nearly all of the wealth you’ve been building tied up in the markets. Gone. In the blink of an eye.

    “Do we have any other choice at this point?”

    Your damn f**king right we do.

    But the Republican National Socialists are the last folks in the world that would either let on to that reality — or have anything to do with finding those alternative solutions.

  24. Abbott_Of_Iona

    What happens next Monday/Tuesday/Wednesday when there are no short sellers to whom a holder of stock can lend? If the holder of stock is concerned about risk and is not convinced by the outline of the Paulson Controlled Demolition they will have no choice but to dump the stock of banks and financials that they consider to be at risk of a large haircut.

    The Paulson plan could spectacularly backfire.

  25. Anonymous

    “Of the two candidates, McCain has picked up on this better than Obama. But neither of them is doing what Huey Long would have done: make the FIRE sector pay for its own bailout by taxing them to their knees, after raking them over the fiery coals of Congressional hearings and then convicting the ringleaders.”

    If Paulson/Bernanke continue with their plans to devalue the currency with massive inflation, we’ll get a populist like that Huey Long or Andrew Jackson that takes action. As everyone knows, Andrew Jackson killed the second Bank of the US to hurt monied interests. When you get a populist backlash things like that happen.

    If the inflation is bad enough, you even wind up with leadership like in Zimbabwe or Weimar Germany. Idiotic policies have consequences.

  26. ruetheday

    So hedge funds and foreign firms are not eligible to participate. What prevents hedge funds and foreign firms from selling these securities to eligible US banks to offload on the gov’t?

    They’re going to buy whole mortgages, MBS, and CDO. Well, how does that work? Near as I can tell, if the gov’t buys the mortgage, they’d have to buy the derivatives written on top of it or they open up all sorts of arbitrage opportunities where hedge funds scramble to buy the derivatives on the mortgages the gov’t buys.

    And what is market price for products for which there is no market? I’ve heard some talk of reverse auctions. What happens to all of the securities that are similar to the ones the gov’t buys – the gov’t is essentially establishing a market price. What are the implications of this with regard to mark to market accounting for firms holding those similar securities?

    William Poole, former St Louis Fed President said it best yesterday, “I’m afraid that we’ve got a grand idea that when we start to actually write it down on paper, how it’s going to work, we’re going to find one stumbling block after another.”

  27. One Salient Oversight

    Capital Flight = Substantial Devaluation of US Dollar = US Economic Armageddon.

    Time to follow the Washington Consensus:

    Click here and here (links to my blog where I discuss this issue).

  28. Blissex

    «Why do we need the government to create a massive and costly effort to buy paper at market prices?»

    No, it would be bought at “fair” prices. Paulson has implicitly argued that “fair” prices are *way* above market prices, by stating that market prices are depressed by lack of liquidity, and thus market price discovery is broken:

    «a plan to buy bad assets at above market prices but somehow pretend that they are indeed correct.»

    Accordingly, as to this:

    «Oh, PS, and who gets to decide if the mortgage prices are fair? Consultants hired by the Treasury.»

    Well, the “fair” prices will be determined by people nominated by those who have been elected thanks to generous campaign donations by the sellers of those assets. What could be more fair than that?

    As to consultants, I am reminded of this paper:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1025984
    «Abstract: Clients demand bad legal advice when legal advice can favorably influence third-party conduct or attitudes even when it is wrong. Lawyers supply bad legal advice most readily
    when they are substantially immunized from accountability to the people it is intended to influence.
    »

    «Given how costly and ineffective this Administration’s outsourcing has been,»

    Instead of “costly and ineffective”, words typical of the “nattering nabobs of negativism”, I would use “profitable and wealth creating”, looking at the other side of the deal. :-)

  29. guarionex

    Serious question: Does anyone know what this means?

    http://www.moneymarketing.co.uk/cgi-bin/item.cgi?id=173208

    US Government to secure mortgage market with gold reserves
    Lee Jones – 19-Sep-2008

    The U.S. Treasury Department has promised “hundreds of billions” to save the US markets using its own gold reserves.

    President Bush approved the use of existing authorities by Treasury secretary Hank Paulson to make available as necessary the assets of the Exchange Stabilisation Fund for up to $50 billion to buy more illiquid mortgage assets.

    When the Government bailed out the the Government Sponsored Enterprises it promised to buy illiquid mortgage backed securities, but this announcement extends that pledge.

    The ESF was created after the Great Depression and uses the US gold reserve as collateral for financial stability.

    Are they raiding Fort Knox to keep asset prices inflated?

    Thanks.

  30. Matthew Dubuque

    Matthew Dubuque

    Yves-

    I really have to hand it to you. I woke up this morning in foul mood, irritated that the American era has now been irrevocably replaced with the Asian epoch in world history while the nation, whose long-term memory has been erased by too much television, slept.

    But your outstanding post cheered me up considerably. Thank you. It’s full of great and incisive content.

    Remember, Merrill sold this toxic radioactive waste at 22 cents on the dollar. Why is the rosy scenario crowd so sure this was a false price?

    NO CAPITALIST ON THE PLANET wants this toxic waste on their books. No hedge fund, investment bank, commercial bank, insurance company, participant in vast dark pools of capital, no organized crime consortium, no speculator, NOBODY wants to go NEAR these securities.

    Yet SOMEHOW if the US taxpayers purchase it at outrageous prices it will become, magically investment grade.

    My, my.

    One quick note. I’m unable to join in the chorus “Bye, Bye dollar” just yet.

    Recall that the Federal Reserve is NOT a fully public entity. PRIVATE investors, such as the Morgan family, OWN a substantial piece of it.

    They will NOT hesitate to RAISE interest rates if the value of their Treasury portfolio plummets.

    I explore this in considerable depth in my videos:

    “THE ENDGAME: When the Federal Reserve RAISES Interest Rates” at:

    http://tinyurl.com/497vvv and

    http://tinyurl.com/3gve3e

    The idea that the Fed would RAISE interest rates in this unfolding drama is laughable to most Americans.

    I understand. But as far as I know I was the first person in the world publicly claiming the Fed would let Lehman fail. And my public track record has been pretty remarkable over the last 26 years.

    I’ll leave it at that.

    Keep up the great work. You made my day!

    Matthew Dubuque

  31. Blissex

    «But Paulson cannot say that this amounts to a recapitalization of banks, done in a very inefficient fashion.»

    But why recapitalize banks? Why not let them fail?

    The usual argument is that this could cause big damage to the real economy.

    But why not let the banks fail and bailout the real economy then?

    Isn’t bailing out the banks the tail wagging the dog?

    «It would be too controversial to admit that.»

    Ah yes. Perhaps the financial system is now the dog and the tail is the real economy. :-)

    «But Congress may figure it out regardless.»

    Congress mostly represents the interests of campaign donors.

    Are there any of those opposed to bailing out the banks instead of the real economy? How generous with campaign donations have been those who would have to pay for the bailout?

    I wouldn’t be too optimistic. America is the land of opportunity for winners, not losers.

  32. s

    Totally agree with your assessment. No wonder ken Lewis hasn’t cut the dividend. This has been in the works for a while and for sure he knew he would have the opportunity to dump it on the taxpayer. Up sent a note to senator yesterday demanding that one dollar infusion should be accompanied by massivily dilutive warrants to the current equity of any company using our liquidity pool.I have no faith ign the idiots in congress. Very sad day. Uf the banking complex gets away with this it will be the sinhle greatest theft in history of the world. None of this forstalls home prices falling more. Further getting banks to lend on dalung assets would be skin to asking them to rinse wash repeat. Utterly moronic. Replenshing capital is one thing eversing the business cycle is another. This market is going down snd trillions of dollars may protect money markets and FDIC but equity markets are massivily overvalued. And as rates go up it will add pressur to the mortgage rate and the home price negative feedback loop. Printing money is no solution but the geniuses in DC don’t gave a solution. Becair there is bone. I agree with mellon. Liqiudate them all. I would love to put all the bankers on the start line again even if it meant me eating grass.

  33. s

    Totally agree with your assessment. No wonder ken Lewis hasn’t cut the dividend. This has been in the works for a while and for sure he knew he would have the opportunity to dump it on the taxpayer. Up sent a note to senator yesterday demanding that one dollar infusion should be accompanied by massivily dilutive warrants to the current equity of any company using our liquidity pool.I have no faith ign the idiots in congress. Very sad day. Uf the banking complex gets away with this it will be the sinhle greatest theft in history of the world. None of this forstalls home prices falling more. Further getting banks to lend on dalung assets would be skin to asking them to rinse wash repeat. Utterly moronic. Replenshing capital is one thing eversing the business cycle is another. This market is going down snd trillions of dollars may protect money markets and FDIC but equity markets are massivily overvalued. And as rates go up it will add pressur to the mortgage rate and the home price negative feedback loop. Printing money is no solution but the geniuses in DC don’t gave a solution. Becair there is bone. I agree with mellon. Liqiudate them all. I would love to put all the bankers on the start line again even if it meant me eating grass.

  34. Anonymous

    Matt Dubuque,

    I do not understand why you claim the Federal Reserve is a privately owned bank operated for profit. Title 12 of the United States Code, regarding banks and banking, says otherwise.

    The 12 member banks of the Federal Reserve required to be owned by banks in their districts. The member banks are not operated for profit, and the member bank shares cannot be sold, traded, or pledged as security for a loan.

    This is a link to a summary on the Fed’s website: http://federalreserve.gov/generalinfo/faq/faqfrs.htm#5

  35. Anonymous

    “a plan to buy bad assets at above market prices but somehow pretend that they are indeed correct.”

    Or to paraphrase a blind-pool prospectus from the South Sea Bubble in 1720:

    “a plan to buy bad assets at above market prices, but no one to know what they are.”

    Bwa ha ha ha … America Number One! Death to the middle class!

  36. fyego

    The solution to financing this 500 billion to 1 trillion mess is simple. Since the money is being used to bailout the rich, all that is needed is to find financing to pay it off. Raise taxes on everyone who benefited from the excess – those who make 1 million a year should have their tax raised from 35% now to 55-75% to pay off their problem. Why should the poor and middle class pay for this – just so Goldman Sachs can hand out another 18 billion (in 2007) or 16 billion (in 2006) in bonuses? Couldn’t Goldman Sachs use that 34 billion today? Couldn’t we use it to finance this mess?

  37. Anonymous

    yves
    This may be naive but isn’t it possible to guarantee the mortgages instead of the bonds.
    I understand that the 2006-7 RMBS are the most toxic but earlier ones should be able to be backed more cheaply getting some credit into play quickly. Then the mortgages themselves themselves can be dealt with more slowly
    I think Clinton and Schumer are making noises in this direction
    Plschwartz

  38. Anonymous

    @fyego:
    I wonder that your suggestion is not more often claimed.
    A lot of people filled their pockets with our money (a manager of a health security company earned within a few years 1.8 billion dollars ! – unbelievable, even for a lifetime´s work).
    Special situations need special remedies: general bailout – ok, but only if the tax-rate will be increased for the time since 2000 – where the whole mess started).

    Good luck to all.

  39. Anonymous

    This will allow the CEO,CFO Ect stock holders to sell their holding during this temporary bounce and leave the tax payer holding the bill and struggling to survive the depression this insane action will unleash, who will fund this mess not the US we are functionally bankrupt as a nation depending on outside investors who are getting very distrustful of our ability to even pay the interest on the debt

  40. Anonymous

    September 20, 2008

    To: Cash Mundy

    Loved your “lose house and then pay for it” statement, and would suggest that it may be more like “lose house and then pay for it three times over.” And on this early Saturday morning it took me a moment to figure out what the hell you were saying, but when I did it really hit the mark. You’re right. You’re not ready for prime-time government employment.

    Personally I’ve been writing in the “Average American” mode not “me” in specifics. My wife and I moved back to Santa Cruz about five years ago after a year in Mexico that we thought would be permanent. We rented a nice 2 beds, 2 baths, bungalow near the beach that we have absolutely loved on a “temporary basis” that has turned into five years, and then watched house prices escalate at $50 to $100 grand a year, much to my distress, thinking that I had missed out on all of that appreciation. Well, guess what? I probably “missed out” on a lot of heartache. As the old saying goes, “Even a blind pig finds a few acorns.”

    Best regards,
    Earl

  41. njdoc

    Ladies and Gentlemen,

    There is only a political solution to this problem. Any congressman/woman who votes for this action should be summarily voted out of office. Only a populist surge will keep Paulson from passing on the Wall Street IOU’s to the taxpayers. The financial mercenaries must best stopped! Paulson says that this expensive bailout will cost the public less than the alternative. I believe this is a nonsensical statement, because at every step of the way during this crisis he has tried to bail out the oligarchs. It is indeed time for an Andrew Jackson moment, not an Alan Greenspan moment.

  42. Blissex

    «A lot of people filled their pockets with our money»

    A lot of WINNERS made a lot of money out of a lot of LOSERS.

    In America it is immoral to let suckers keep with what should be money belonging to winners.

    «(a manager of a health security company earned within a few years 1.8 billion dollars ! – unbelievable, even for a lifetime´s work).»

    That’s just the politics of ENVY by sore LOSERS. You should celebrate how that manager managed to become a WINNER, and be ashamed that you did not manage to do the same.

    «Special situations need special remedies: general bailout – ok, but only if the tax-rate will be increased for the time since 2000 – where the hole mess started).»

    That’s again the politics of envy against your betters, and I’ll let the Financial Times editorial page tell you how business is done in America:

    http://www.ft.com/cms/s/0/ac088992-8679-11dd-959e-0000779fd18c,s01=1.html

    «Naturally, the need for such a government-sponsored rescue is annoying. Taxpayers may well wish for the imposition of a special tax on recipients of what have turned out, retrospectively, to be unearned dividends and unjustified salaries. But demanding such a pay-back is infeasible. The pragmatic thing to do is let bygones be bygones, though not without paying close attention to the longer-run consequences of the rescue plan.»

    You read that? Those WINNERS who have taken as much as they could by hook or crook, get to keep what the have taken, and to LOSERS foot the bill, and make whole the losses of the winners. That’s democracy at work: America salutes the ability of their elites to generate so much wealth for themselves. American voters have been voting for that since 1983.

    :-)

  43. Skeptical

    You are right – Ken Lewis knew about this for a long time…and so did Barclehs in a likelihood.

    See here…there is some hope:

    http://www.bloomberg.com/apps/news?pid=20601109&sid=aIaOyCf.U_bU&refer=home

    What a shame…so those teenagers were right a couple of year ago, the Constitution does mandate, 'from each according to his ability, to each according to his need…' do the i-banks, who contributed NOTHING real over the past several years, really need this so badly??? Or is it just a sop from Paulson to his old buddies at GS and MS, and his new BFF, Ken Lewis? The lawsuits from C'wide haven't even begun. What are these guys getting us into.

  44. Blissex

    «It’s worse than most people would have imagined»

    You mean it is better for Wall Street of course — why be negative?

    Commenters from CR have singled out these two fabulous provisions:

    «designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;»

    «Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.»

    These means that the Republicans are really sure that McCain wins, or Wall Street is sure that they have Obama in their pocket.

    No way that Republicans would hand over that kind of power over their funding sponsors to someone that has not been nominated by them.

  45. Anonymous

    THE WRITER OF THIS STORY NEEDS TO HAVE HIS BALLS CUT OFF OR THERE OF FOR SUGGESTING HOMEOWNERS SHOULD GET NOTHING! HE IS AN IDIOT, JUST PLAIN FUCKING STUPID ASS PLACED THERE BY THE BANKS, GO FUCK YOURSELF JACKASS!

  46. ruetheday

    Wait a minute. I just read through the proposal. What happened to establishing an RTC-like entity to liquidate the assets? What happened to an RFC-like entity to recapitalize the banks? What happened to an HOLC-like entity to deal with the situation from the homeowner side?

    All they are doing is handing Paulson a $700 billion check and telling him to buy mortgages and related securities over the next two years to prop up the market. This isn’t a solution. This is a transparent attempt to simply manipulate market prices upwards. What happens when the effect is only temporary and the markets fall off a cliff again? Raise the limit to a trillion, two trillion, let the Treasury start buying corporate bonds, equities, etc.? This is a joke, except it isn’t funny, it’s deadly serious.

  47. Anonymous

    Hey Matthew: “The End Game” glosses over the inflation cycle, it needs to run it course. Mixing banking with the free market is non sequitur. This factional reserve bank system always implodes via its built in ‘inflate to infinity until you die’ poison pill, no room for deflation in this model just delay tactics. Whereas the markets live on.

  48. Anonymous

    We all know what trillion is. When did we use or hear that word last. Most of us won’t be able to recall. Going forwards be prepared to listen/say this word several times a day.

  49. Anonymous

    This legislation is despicable. We all need to write letters or send faxes to our representatives in Congress telling them to vote against it, or we’ll vote against them, no matter what.

    If you write your representatives, you need to include your name and address, so they know that you are one of their constituents. Email isn’t as good, but if you send email, you need to provide your name and address. Senators and Congress people don’t care if they get anonymous emails, letters, or faxes.

    It would be wonderful if someone sets up a website, so we can take collective action to oppose this legislation, and anyone in Congress that supports it. They are going to destroy our money with inflation, and destroy our future income with taxes.

  50. Dean

    “And to preserve their independence, we must not let our rulers load us
    with perpetual debt. We must make our election between economy
    and liberty, or profusion and servitude.”
    – Thomas Jefferson

  51. Blissex

    «What happened to establishing an RTC-like entity to liquidate the assets? What happened to an RFC-like entity to recapitalize the banks? What happened to an HOLC-like entity to deal with the situation from the homeowner side? All they are doing is handing Paulson a $700 billion check and telling him to buy mortgages and related securities over the next two years to prop up the market.»

    Ah no, that not what the act says: it says that Paulson gets $700 billion, and then he can do ABSOLUTELY ANYTHING HE WANTS, including any criminal act he chooses to commit, because the text says:

    «Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.»

    Under this authority he could have “financial terrorists” who short Goldman Sachs stock taken off the street and subjected to “enhanced interrogation techniques” and get away with it.

    BTW I suspect that “pursuant to the authority of this act” (and not “within the authority of this act”) can be construed in a very extensive way, also because the act is anyhow very widely worded.

    Also note that it seems that this blanket immunity from both civil suits and prosecution seems to extend to anybody involved, because what cannot be reviewed is the decision; it not merely the personal immunity of the secretary.

    Also the language is not that the secretary or anybody involved cannot be punished, but the decisions cannot be reviewed.

    At least if it was merely equivalent to an automatic pardon or non-punishability, a court could review and investigate if only to declare innocent or guilt, even if an automatic pardon would ensue.

  52. Blissex

    «Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.»

    To add: to use the current panic to get this passed is beyond despicable. It is not just a blank check to spend $700 billion as pleases, it is also a blank warrant to bypass all existing civil and criminal statutes.

  53. William Mitchell

    For Bush cronies, it’s one last chance to exploit public fear to enrich their friends. It’s the new terrorist boogeyman.

    Paulson frightens Congress into silence Friday with doomsday scenarios of frozen payrolls and credit cards (all commercial paper-related), then argues the only solution is to rescue banks that haven’t failed, with him as the sole arbiter, accountable to no one, not even to the courts (see Treasury’s proposed language at CalculatedRisk).

    Paraphrasing: there are terrorists coming from Afghanistan, so let’s invade Iraq.

    Meanwhile, the real enemy — lack of transparency — is pushed out past the end of the term.

    Deposits are already guaranteed. We should instead just massively recapitalize the FDIC, inflation-adjust the insured limit to $250k, then tighten review of bank balance sheets, forcing the weakest to fail now. Then darken the suburban skies with massive leaflet drops explaining the situation, and why their deposits are safe at any bank.

    But no. Instead, banking cronies will sell bad mortgages at a premium. Then other banking cronies will buy them back at a discount. Vast fortunes will be made in coming months, but not by you or me. And you will have no recourse in the courts, per the Treasury proposal.

    And get this: I’m a Republican! Who knows what Democrats must think.

  54. Anonymous

    “But no. Instead, banking cronies will sell bad mortgages at a premium. Then other banking cronies will buy them back at a discount. Vast fortunes will be made in coming months, but not by you or me. And you will have no recourse in the courts, per the Treasury proposal.”

    That is exactly right. With ZERO SAFEGUARDS this legislation is a license for politically connected people to basically embezzle money from the US government. This is a travesty of justice.

    The government could open new banks, and capitalize them, for WAY less money than this absurd scam. I am ashamed our President proposed this legislation. I am shocked and disgusted at Bush, Paulson, and Bernanke.

  55. Anonymous

    I wrote my congressmen the following letter and I urge everybody to do something similar-

    I am writing in regards to the plan presented by Treasury Secretary Hank Paulson yesterday to use taxpayer money to buy mortgage securities from commercial banks and investment banks that the private sector is unwilling to buy. I think this is a terrible idea and I do not support it in any fashion. For one it is a complete waste of a significant amount of money, I think he mentioned $500 billion or more just for this program alone, and it does not deal with the root cause of this credit crisis. This is merely an attempt by the Treasury Secretary and the Federal Reserve Chairman to scare the American public into this ill fated adventure. They allude to the idea that the financial system will collapse without this proposal being implemented. So they make it a choice between their knee jerk, expensive proposal or economic collapse. Please do not fall for this. The root cause of the credit crisis are the policies of the Federal Reserve itself which lowered the fed funds rate from 6.5% in 1999 to 1% in 2003. This along with the significant leverage that our large financial institutions are allowed to operate with, and lax regulation of mortgage origination and securitization allowed these large financial firms to take inordinate risks very cheaply. Now that this has all collapsed why should the taxpayer be on the hook for their mistakes and greed? I urge you to vote against accepting any proposal that is presented to congress which uses taxpayer dollars to buy mortgage debt from private financial institutions. Where will this money come from? The Treasury and the Fed will print it out of thin air which will cause our fiscal deficit to widen and our currency to devalue. I would recommend to you that the following objectives be accomplished in any restructuring of our financial system:
    1. We move to a hard currency backed by a significant amount of gold which cannot be devalued for the purposes of satisfying the whims of policy makers.
    2. Disallow the Federal Reserve from exchanging treasury securities for private sector assets on its balance sheet. Its balance sheet must remain sound.
    3. We institute regulations that do not allow large regulated banks to use significant amounts of leverage, or get involved with exotic illiquid securities, because this puts all Americans at financial risk.
    4. Lightly regulated or unregulated financial firm such as investment banks and hedge funds must find private sector solutions to their problems or go bankrupt. To insulate the public from the effects of bankruptcy on the financial system, their size must be limited and their leverage monitored.

    I thank you for hearing my concerns regarding this very important issue at this historical moment

  56. Blissex

    «The root cause of the credit crisis are the policies of the Federal Reserve itself which lowered the fed funds rate from 6.5% in 1999 to 1% in 2003.»

    The root cause goes surely back to 1995, as the Great Republican Credit Explosion started then. I’ll repeat here some clear graphs that show that something happened in 1995 that changed the slope of most financial trends:

    bigpicture.typepad.com/comments/2007/10/margin-debt-gro.html
    http://www.nowandfutures.com/key_stats.html
    finance.yahoo.com/q/bc?t=my&s=MER&l=off&z=l&q=l
    finance.yahoo.com/q/bc?t=my&s=FNM&l=off&z=l&q=l
    finance.yahoo.com/q/bc?t=my&s=IBM&l=off&z=l&q=l
    finance.yahoo.com/q/bc?t=my&s=GE&l=off&z=l&q=l
    bigpicture.typepad.com/comments/2007/12/no-inflation-no.html
    blogs.cfr.org/setser/2008/09/08/the-stealth-bailout-illustrated-in-close-to-real-time/

    All of these for some reason turn up sharply in 1995, starting to run at way above GDP growth.

    All the subsequent bubbles (1996 stocks, 1999 dotcoms, 2002 bonds, 2005 houses) have been fueled by what looks like a colossal expansion of credit.

    The only plausible explanation that I have found is this:

    http://www.signallake.com/innovation/FedReserve1995.pdf
    «The key event that happened around 1995 is that the fractional reserve ratio was not only lowered, it was effectively eliminated entirely. You read that right. The net result of changes during that period is that banks are not required to back assets which largely correspond to M3 or “broad money” with cash reserves. As a consequence, banks can effectively create money without limitation. I know that sounds hard to believe, but let’s look at the facts.»

    and considering subsequent events like this:

    bigpicture.typepad.com/comments/2008/09/regulatory-exem.html

    it was part of a continuing determined effort to gear up the financial sector to very high leverages, of which the 1%-2% nominal rates are just part.

  57. Anonymous

    Yves, so why not boost Nouriel Roubini’s very sensible plan, based on a historical precedent, the HOLC (Home Owner’s Loan Corporation) of the 1930s?

    On my blog, I have explained that the Paulson plan could work, and that it shouldn’t be discarded out of hand as unworkable. It should be discarded because the Administration has established a record as being a bunch of lying, incompetent weasels.

    –Charles of MercuryRising
    http://www.phoenixwoman.wordpress.com

  58. Anonymous

    Anonymous 2:12PM sure is a filthy writer. My Daddy always said that was a sign of an empty head. How about cleaning yourself up a bit if you have the intelligence. Such filthy language is very offensive. Thanks loads.

  59. Anonymous

    Anon 8:04 writes…”But neither of them is doing what Huey Long would have done: make the FIRE sector pay for its own bailout by taxing them to their knees, after raking them over the fiery coals of Congressional hearings and then convicting the ringleaders.”

    YES YES and YES!

    Slap on the wrist? NOPE!

    The US was for SALE and they SOLD US!

    Puleeeaassseee – whether or not we agree with the ‘bailout’, we must agree that heads should roll…

    In my business we take responsibility for our product; good or BAD…

    Do the wall street blokes believe that they are not culpable? As individuals? As companies? Should they not say SORRY! Or, as Brittney says, “OOOPPPPSSS I DID IT AGAIN!”

    Yes, I’m mad as hell and I’m not going to take it anymore! (saying from the movie NETWORK, which we all should revisit)

  60. mxq

    Thanks for putting this stuff all together, Yves…great stuff.

    RE: “bye the US’s AAA rating and the dollar”

    I wonder what China is gonna do about this?

    Won’t they have to buy (choke down) all of this new paper in order to keep the yuan weaker vs. the USD?

    If they don’t, exports (including employment) from the US are going to steadily trump Chinese exports. But i guess its gotta happen sometime. I bet the Chinese domestic economy can’t support itself yet.

  61. Juan

    blissex, i think you may be confusing claims against anticipated wealth creation with wealth creation itself. IOW, fictitious capital, no matter the price, is perfectly unproductive while, other hand, the post-83 real economy has not been exactly spectacular unless looking at its self-cannibalization.

  62. Blissex

    «If they don’t, exports (including employment) from the US are going to steadily trump Chinese exports. But i guess its gotta happen sometime. I bet the Chinese domestic economy can’t support itself yet.»

    The bad news is that it may be; internal consumption and investment is currently responsible for more of its growth than exports.

    At this point it may be in the best interests of the Chinese to pull the rug from under the USA financial system.

    A huge USA recession and a collpase of the dollar would drive down both the price of raw materials and the price of raw material assets, and the chinese economy in the future is probably going to be more constrained by the availability of raw materials than of export markets.

    The chinese government might decide that they should stop funding the USA, and use the dollar reserves that they have to buy up a lot of mines, agricultural land, etc. around the world at firesale prices.

    After all USA corporates have already transferred a lot of their most critical production capacity and technology to China, under the control of the CCP, and that’s probably good enough for China, and they no longer need to subsidize the transfer of capital from the USA.

  63. Anonymous

    yves:
    In yesterdays FT there is an article
    A Matched Preferred Stock plan for government assistance

    by Charles Calomiris

    Which seems to be an revisio n of Schumers plan.

    The way that Paulson wants to steamroller his plan, there has to be some viable alternative sketched out. And I wonder if the Calomaris plan might form a framework.
    In any case if you and other bloggers do see some more reasonable solution in the Schumer’
    plan there needs be some overt support for it from you and other major economic blogs

    The down side is that Chuck’s head will get so big he won’t fit through a doorway :)
    plschwartz

  64. Anonymous

    WOW! – I read a cryptic newsletter a few weeks ago that said the IMF/IBS has ordered the US bring this toxic debt back home.

    All foreigners are p!ssed at having this ‘AAA’ garbage on their books.

    Some of you have already postulated the following- foreign entities sell the crap back to US financial institutions at a slight discount. The US entities mark it up (for a slight profit)and the US government (taxpayear) eats it. PRESTO! The debt re-patriates itself.

    There are monied interests that really run the show in this world. ANd the US is becoming more of a bit player.

    “The debtor is slave to the lender.” That is true for American citizens AND the NATION. Better find out quick what book that quote is from and read it.

    I just may have to subscribe to this newsletter. Trouble is it nearly scares the crap out of me. Let’s just say its tone is ‘depressing’.

  65. Anonymous

    Every citizen that has a pulse should call their senator and congressional rep as well as Chris Dodd, Chuck Schumer and Barney Frank and oppose this proposed legislation.

    This is a "you've got be kidding me" piece of legislation. A bill written by Wall Street to benefit only Wall Street and rape middle class Americans. This bill will be a cesspool of cronyism and corruption! Specifically note Section 8. No action by the Treasury Secretary under this Act is reviewable by either Congress or our Courts. Un-f**ing-believeable!!!!

    Only if you want to live in perpetual servitude will you sit back and do nothing!!!!

    PLEASE ACT. CALL YOUR CONGRESSIONAL REPS & SENATORS.

    No. No. NOoooo! on Hanky Panky's Bill.

  66. Anonymous

    Why do we need banks? To provide credit. There are plenty of banks, many small ones, but also some larger ones, that have little if any junk paper on their books. They are continuing to lend following time-tested sound practices and current spreads are such that they are making a nice profit doing so. Encourage the badly-run banks loaded with crappy paper to fail ASAP, so that the well run banks can step into their place. If their capital is insufficient for the needs of the economy, let the government buy stakes in them to increase their capital. Or, alternately, let the government lend directly through a network of postal banks located in each post office, as is done in many countries. I’d rather put the money into the hands of sound and prudent lenders who can get it to where it is needed, than buy up junk paper.

  67. Anonymous

    The US, to use a favorite Bush expression, has become a failed state. Immediate regime change is called for. Giving the folks who drove the bus off the cliff $700 billion more to blow is loony-tunes.

    The Dirty Half Dozen — Bush, Cheney, Paulson, Cox, Lockhart and Bernanke — need to walk the plank immediately. Bernanke is beyond the reach of impeachment, but should be urged out by a vote of no confidence.

    Conservatorship for this failed state is urgent, and Job #1 is booting the disgraced management. Sunday morning is not too early to start, before the next bailout is announced. Toast ’em to crispy critters!

  68. S

    The Dirty Half Dozen — Bush, Cheney, Paulson, Cox, Lockhart and Bernanke — need to walk the plank immediately. Bernanke is beyond the reach of impeachment, but should be urged out by a vote of no confidence.

    Yu forgot the asshat Geithner who runs the NY Fed. He should be thrown out on his ass for obstruction in congressional hearings re Bear Stearns as a starting point.

  69. Anonymous

    The gov’t for the moment is trying to act as the backstop to the shadow banking system. Providing the cover for the lack of meaningful reserve’s (leverage) that the shadow banking gearing has allowed. Now the Gov’t has enjoyed this massive credit creation since it has allowed the economy to experience a higher level of growth without large liquid capital reserves. Clearly without this high level of credit gearing the economy will slow down and with it goes millions of jobs and various business of all types.
    This bailout cannot resolve the issue because the shadow banking system has crashed and AIG being the private insurance vehicle that everyone believed was the final backstop, basically said the system is a fraud. While the shadow banking system or parts of it may be overhauled in the coming months and years it cannot operate without either gov’t financial backing or much higher reserve’s which is exactly what it was designed to avoid.

  70. Anonymous

    «Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.»

    Whistling in the dark, like scared little boys. They know they’re going to jail, some of them, many more will get grilled and stripped of loot like Ken Lay. Every bit of bail-out will wind up in the US Supreme Court sooner or later, starting with this silly proclamation of blanket indemnity.

  71. tz

    TrillOIns? At least that is how it is spelled in the RSS feed

    The SEC shortselling ban was unfortunately not a sideshow. It blew up many in the market and we’ll see what happens when the forced liquidation goes on. Then there’s the frozen options market.

    If I was an evil terrorist mastermind, and I wanted to lock up the markets and strangle liquidity, could I come up with something worse.

    As to prices, there is one subtlety. What is the market value of my house today? Zero. No bids. Unless someone comes to my door. I can put it for sale and establish an ask. It can have an appraised value.

    For insurance purposes it has one. Same for property tax.

    The various MBS and other stuff presumably have something inside that can be – perhaps with great difficulty – appraised. Maybe not everything, but at least some.

    If it happens that no one is buying houses, the appraised value will be well above the “stink bid” market value.

    Still probably well below the housing bubble price, but still well above the price someone is willing to take it at in the next 24 hours.

  72. Anonymous

    Agree with Anon 11:31. I’m no lawyer, but “. . .may not be reviewed by any court of law or any administrative agency” just smacks of being unconstitutional

  73. Andy

    The final hand has been played and all the cards on the table. Is this a winning hand? I don’t think so, as I wrote in my recent analysis – “While this may save our skins in the near term I think it is going to put America in a big black hole for the next decade or more.”

  74. Matthew Dubuque

    Matthew Dubuque

    Agreed, that provision sounds unconstitutional on its face.

    Latest feeds I’m reading are saying that Bush revisions now favor bailing out FOREIGN banks (with US subsidiaries) as well.

    Pathetic.

    Why should US citizens bail out German banks instead of German citizens?

    A bit much.

    Matthew Dubuque

  75. Anonymous

    I posted this in another thread.

    WOW! – I read a cryptic newsletter a few weeks ago that said the IMF/IBS has ordered the US bring this toxic debt back home.

    All foreigners are p!ssed at having this ‘AAA’ garbage on their books.

    Some of you have already postulated the following- foreign entities sell the crap back to US financial institutions at a slight discount. The US entities mark it up (for a slight profit)and the US government (taxpayear) eats it. PRESTO! The debt re-patriates itself.

    There are monied interests that really run the show in this world. ANd the US is becoming more of a bit player.

    “The debtor is slave to the lender.” That is true for American citizens AND the NATION. Better find out quick what book that quote is from and read it.

    I just may have to subscribe to this newsletter. Trouble is it nearly scares the crap out of me. Let’s just say its tone is ‘depressing’.

    NOW, the foreign availability is explicit, no back door dealing is necessary. Maybe this writer is onto something. He must be right, because no one in his right mind, and who has a soul, would willingly do this to his country?

    Would he?

  76. Hubert

    The historic parallel with the Hitlers “Ermächtigungsgesetz” in 1933 shows a few things more: GErman parlamentarians were at least intimidated and threatened before, some of them already in concentration camps – so it was plausible for them to vote “yes” or not vote at all. And some really voted against it.

    What excuse can a Democratic party majority in two houses of Congress make up?

    They abdicdated their responsibility in the IRak war and now they just hand over their “power of the pursue” to some guy from Goldman Sachs that Paulson will nominate for Banking Handout Czar ?

    Why does the US need a COngress after all?
    This is blatant enrichement without any fig-leaves.
    I am not an US taxpayer but it makes my stomach turn anyway.

    The US political system will probably have declared its bankruptcy by Friday. Maybe Obama really means it but I guess he wants some face saving measure attached to the bill.

    Sorry to say but no thinking person can escape the conclusion: The US – which lectures other countries in “democracy” – is bankrupt not only financially but morally.

    The day the Chinese and Japanese decide that enough is enough this game will be over. That day might be today.

  77. Hassen Saleh

    With a total budget deficit surpassing 11 trillion when all the cost of the projected bail out is added, the US, by going solo, is really embarking on a journey of wealth destruction of its citizens. The only way to control this finacial nightmare is to persuade the major economies of the world, who also happen to be holders of the toxic derivatives at the core of this fiasco, to particpate in the bail out in the interest of the world economy. Even though the failed financial engineering may have originated in the US, its effects are being felt almost everywhere in the world. For this reason, I believe it is not far fetched to bring every major economy on board. This approach will have a better chance of stabilizing world markets and restoring confidence in their financial systems without unduly burdening the American tax payer with an insurmountable debt, leading to unmanagable inflation and a serious decline in the standard of living of Americans.

  78. Carrick

    Can I get some analysis of or rationale behind sketchy sections of this bill?

    Sec. 8 seems outright unconstitutional and illogical. Would making specifics of the plan public record dampen its effectiveness? Why in the world shouldn't the President, at minimum select members of Congress and the Supreme Court be watching this every step of the way?

    Then a sit-down in 3 months, followed by bi-annual update? What absurd transfers of wealth and power occur during that time?

    All this looks like, is the concentration of the nation's wealth and power in one branch of Govt, with accountability to none.

    I know it sounds conspiratorial, but there are a handful of Executive Orders from Bush relating to the continuity of Govt (PDD 51), in times of terrorist attack or massive financial crisis- and they've been sealed from Congress (including members of the Select Committee on Homeland Security.) Thoughts?

    ……………………………..

    For any finance whizzes out there, if you could sit with every member of Congress, what would you be warning them of? How are you explaining this to your lay family members?
    (Please answer this)

    ……………………………..

    This all smacks of bullshit to me. 'Wealth is never lost, merely transferred', right? So why is this being reported like as though an uninsured bank vault caught fire? "Lost lost lost!", lost where? Plenty of our wealth has been exported and moved upward, now we send our remaining wealth up, take on more risk AND cede power to an ultra-strong (Constitutionally & financially) Executive Branch?

    Please answer this stuff for me, and include my name in the Re: so its followable.

  79. Peggy McGilligan

    When Bill Clinton eased banking restrictions, he dished out $8-billion dollars for “community reinvestment loans.” The money just evaporated. When the “creative financing” schemes fell through, as is their wont whenever 30-million Mexican nationals buy inflated properties and default, it left banks in the lurch. Never mind that the aforementioned demographic is the new face of the Democratic Party; the mortgages morphed into “toxic” instruments. Hillary Clinton counted heavily on the loan giveaways to buy votes. Interestingly enough, had Hillary secured the nomination; she, instead of Barack Obama would be presiding over the bailout. So, why should Americans perpetuate the housing bubble? Because it’s a scam! And, this its well-timed exit strategy. Where is that $8-bilion plus dollars? These crooks stole my money; they even stole my car. The bubble is the problem, let it burst: http://theseedsof9-11.com

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