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Why You Should Hate the Treasury Bailout Proposal

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A mere two weeks ago, the Fannie/Freddie rescue was called “the mother of all bailouts” by some commentators. If the plans of the Administration come to fruition, it will shortly be surpassed by the $700 billion mortgage rescue plan proposed by Hank Paulson late last week.

The increase of the request from the initial $500 billion and the release of the shockingly short, sweeping text of the proposed legislation has lead to reactions of consternation among the knowledgeable, but whether this translates into enough popular ire fast enough to restrain this freight train remains to be seen.

First, let’s focus on the aspect that should get the proposal dinged (or renegotiated) regardless of any possible merit, namely, that it gives the Treasury imperial power with respect to a simply huge amount of funds. $700 billion is comparable to the hard cost of the Iraq war, bigger than the annual Pentagon budget. And mind you, $700 billion is not the maximum that the Treasury may spend, it’s the ceiling on the outstandings at any one time. It’s a balance sheet number, not an expenditure limit.

But here is the truly offensive section of an overreaching piece of legislation:

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.

This puts the Treasury’s actions beyond the rule of law. This is a financial coup d’etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse. Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry.

But far worse is the precedent it sets. This Administration has worked hard to escape any constraints on its actions, not to pursue noble causes, but to curtail civil liberties: Guantanamo, rendition, torture, warrantless wiretaps. It has used the threat of unseen terrorists and a seemingly perpetual war on radical Muslim to justify gutting the Constitution. The Supreme Court, which has been supine on many fronts, has finally started to push back, but would it challenge a bill that sweeps aside judicial review? Informed readers are encouraged to speak up.

Nouriel Roubini does not think it passes the smell test:

`He’s asking for a huge amount of power,” said Nouriel Roubini, an economist at New York University. “He’s saying, `Trust me, I’m going to do it right if you give me absolute control.’ This is not a monarchy.”

It would be best if this provision were expunged, but failing that, the Treasury should articulate what scenario it is worried about and any shield against legal intervention should be made as narrow as possible.

Now to the substance. The Treasury has been using the formula that it will buy assets at “fair market prices”. As we have noted, there is simply huge amounts of cash ready to bottom fish in housing-related assets (we saw an estimate of $400 billion a couple of months ago). The issue is not lack of willing buyers; it’s that the prospective sellers are not willing to accept prices that reflect the weak and deteriorating prospects for housing. Meredith Whitney, the Oppenheimer bank analyst who has made the most accurate earnings and writedown calls of her peer group, has noted how the housing market price decline assumptions used by major banks fall short of where the market is likely to bottom, given traditional price to income ratios and expectations reflected in housing futures prices.

In addition to the factors that Whitney (and others) have cited, the duration of the 1988-1992 US housing bear market and major financial crises suggests that that a peak-to-trough decline of 35-40% is realistic (obviously, this average masks substantial variation across markets and housing types). We are thus only a bit more than halfway through, as measured by the fall in prices.

Yet as we discussed, the plan makes no sense unless the Orwellian “fair market prices” means “above market prices.” The point is not to free up illiquid assets. Illiquid assets (private equity, even the now derided CDOs were never intended to be traded, but pose no problem if they do not need to be marked at a large loss and/or the institution is not at risk of a run). Confirmation of our view came from a reader by e-mail:

I worked at [Wall Street firm you've heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It’s supposed to be members only, but there’s no way to enforce that if it’s a conference call, and you may have already heard from other staff who were listening in.

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won’t sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that’s because he didn’t want to admit that the government would just keep offering more and more.

I don’t think that our leadership has been very good during this negotiation (or really, during any showdowns with this administration) at forcing the administration to own their position. If Paulson wants this plan, then he needs to sell it to the public, and if he sells a different plan to the public (the nonsense buying-at-market-price plan) then we should pass that. I’d rather see the government act as a market maker for the assets to get them transferred over to private equity firms and sovereign wealth funds and other willing holders. And if we need to recapitalize these companies, it seems like the cheapest way for the taxpayer is to go in and buy up the distressed debt and then convert that to equity.

So unlike the Resolution Trust Corporation, which took on dodgy assets which had fallen into the FDIC’s lap due to the failure of thrifts, and the Home Owners’ Loan Corporation, which was established in 1934 after the housing market had bottomed, this program is going to swing into action with the clear but not honestly disclosed intent of buying assets at above market prices when future markets and the analysts with the best track records on forecasting this decline (you can add Robert Shiller, CR at Calculated Risk, and Nouriel Roubini to the list) believe it has considerably further to fall.

As we said earlier, this is a covert, not particularly well designed, inefficient, and unduly costly recapitalization of the banking system. Why?

Losses on the paper acquired are guaranteed. This is not a bug but a feature. The whole point of this exercise is an equity infusion to banks. The failure to be honest about it upfront will lead to a taxpayer backlash (or will lead to the production of phony financial statements for the rescue entity, which will lead to revolt by our friendly foreign funding sources).

Taxpayers have no upside participation.

There is no regulatory reform as part of the package. This would seem to be a minimum requirement for a donation of this magnitude.

There is no admission that deleveraging is inevitable. This plan seems to be a desperate effort to keep bad debt from being written down. Yet the sorry fact is that a lot of these assets simply will not be repaid.

There appears to be no intention to do triage. The financial services industry, on the back of an explosive growth in debt, has reached an unsustainable size. The industry will have to shrink. Yet the Administration does not address this issue; indeed, it appears it intends to forestall the inevitable. Regulators need to decide who will make it, who won’t, and figure out what to do with damaged institutions. Instead, the reaction is ad hoc. The stunner was the contemplation of a possible merger between Morgan Stanley and Wachovia. As far as I can tell, the only thing the two firms had in common was coming into crisis on roughly the same timetable. For all I know, their IT systems are not compatible (many an otherwise promising bank merger has been scuttled over IT integration issues).

Reader Marshall forwarded a note from Jon Hatzius, the Goldman analyst who was an early housing/financial firm bear and has forecast that credit-related losses to the economy will reach $2 trillion. His outline of what the rescue program must do:

Basically, I see three main conditions for resolving the crisis (a slicker marketer would call them “The Three R’s”):

a) Recognition. We need to find out what the assets on the balance sheets of banks and other financial institutions are really worth, and what the balance sheets of the most troubled institutions look like under a regime of realistic marks.

b) Recapitalization. The US banking system needs a lot more capital. Credit losses are depleting equity capital, and deleveraging increases the required equity capital per unit of balance sheet capacity. So capital infusions are needed to avert a sharp contraction in lending.

c) Relief. In many cases, we need to restructure the loan terms of homeowners who lack the ability (or economic incentive) to service their mortgage. This isn’t just in the interest of the homebuyers, but it’s often also in the interest of the lender (given the cost of foreclosure) and certainly in the interest of the macroeconomy (given the feedback effects between foreclosures, home prices, and economic performance)….

In any case, recognition is only a start. In fact, recognition actually increases the need for recapitalization because it brings capital shortfalls out into the open. So it will be important to see how the Treasury proposal addresses this. Do they force banks to seek equity infusions from private investors in a specified time period? Do they simply “pay over the odds” for the assets (this would promote recapitalization but jeopardize recognition)? Is part of the program earmarked for the purchase of preferred stock in banks? Or is there a public/private partnership scheme such as an issuance of publicly financed puts in e xchange for warrants for would-be private investors?

As we read from the Congressional staffer, they simply want to “pay over the odds”.

Although I agree broadly with Hatzius, I quibble with his idea that the goal is to avoid a sharp contraction in lending. The US needs to wean itself of unsustainable overconsumption, and since consumption has come to depend on growth in indebtedness, a reversal, however painful, is necessary. Our excesses have been so great that there is no way out of this that does not lead to a general fall in living standards (note that the officialdom in the UK is willing to say that, but since perpetual prosperity is a God-given right in America, admitting we will be getting poorer is verboten). Thus, a sharp contraction in lending seems inevitable; the trick is to prevent it from crossing the tipping point into a vicious, accelerating downward spiral.

But regardless, there has been broad agreement that private capital will not enter the mortgage/housing market until investors have confidence that a bottom is nigh. The Treasury program, by quite deliberately propping up asset prices, will delay finding a market clearing level and thus attenuate the financial crisis.

The unacknowledged dead body in the room is whether our foreign creditors will support this plan. As we have noted before, sentiment in Asia (remember, China, Japan, and Taiwan are among our biggest funding sources) has turned against the US, particularly as AIG, a once-trusted company with a very large client base in the region, both retail and corporate, nearly went bankrupt.

The reason the US economy has not suffered much despite the magnitude of our financial mess is that we have been the beneficiary of what Brad Setser has called “the quiet bailout” as foreign central banks and sovereign wealth funds continued to buy Treasuries (and until recently, agencies) to the tune of $1000 per person. Now consider what we have in store. From the New York Times:

Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.

Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giant American International Group and a plan to spend up to $200 billion to shore up the mortgage finance giants Fannie Mae and Freddie Mac.

Given that continuing to buy US assets will come under increasingly harsh scrutiny overseas, the US needs to bend over backwards to devise a plan that at least looks credible in terms of directing the funds that come from taxpayers and lenders to their highest and best uses and implementing reforms that will restore active and prudent oversight of financial firms. The Administration’s demand for a free pass, even if Congress unwisely goes along, is likely to backfire with our foreign creditors. As reader and sometimes contributor Richard Kline commented:

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.’

If you think this is a tad melodramatic, consider the summary at VoxEU by Carmen Reinhart of her work with Kenneth Rogoff on financial crises (italics hers):

Serial default on external debt—that is, repeated sovereign default—is the norm throughout nearly every region in the world, including Asia and Europe.

Another regularity found in the literature on modern financial crises is that countries experiencing large capital inflows are at high risk of having a debt crisis. Default is likely to be accompanied by a currency crash and a spurt of inflation. The evidence here suggests the same to be true over a much broader sweep of history, with surges in capital inflows often preceding external debt crises at the country, regional, and global level since 1800, if not before.

Also consonant with the modern theory of crises is the striking correlation between freer capital mobility and the incidence of banking crises,… Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.

We have said more than once that the the US in the same position as Thailand and Indonesia, circa 1996, except we have the reserve currency and nukes. It looks like we will have the opportunity to see how those two assets influence the end game.

Update 5:25 AM: I see Paul Krugman is opposed to the plan for similar reasons:

As I posted earlier today, it seems all too likely that a “fair price” for mortgage-related assets will still leave much of the financial sector in trouble. And there’s nothing at all in the draft that says what happens next; although I do notice that there’s nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?

Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

However, so far, Krugman seems to be in a minority among Serious Economists in opposing the plan, or perhaps more accurately, the ones who support it are the ones quoted in the media. I am far from having a complete tally, but Brad DeLong has provided a list of requirements (the plan in its current form falls notably short), while Alan Blinder and Nouriel Roubini give a thumbs up.

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171 comments

  1. gsm_73

    Hi Yves:

    I saw your latest port after I refreshed the page,

    I did see one comment (though old) by Morgan Stanley that nationalisation is not equal to currency weakness.

    regards:

    gsmani@gmail.com

  2. Richard Kline

    A trillion here and a trillion there, and pretty soon you’re talking real funny money.

    There are many options other than Paulson’s plan which Congress could enact, even on an emergency basis, and I hope that they see this: They have choices, and the responsibility to make a viable plan. There is no necessity to thumbprint the financial equivalent of a Reichstag fire bail out.

  3. Shawn H

    “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.”

    The limit is $700B *IN HOLDINGS*. So buy a mortgage from “friendly” fund X for $300k, sell it back to fund X for $150k, then buy it from fund X for $300k, then sell it back for $150k. Hank has unlimited authority to steal an infinite amount of money.

  4. burnside

    Yves, thanks for your thoughts – you have a knack for addressing the things readers would want to know.

    Is it known on what grounds Roubini chooses to support the proposal? Or is he perhaps keeping communication open with the idea of retaining a place in the discussion?

  5. john

    They can’t have any court review because the whole purpose of this is to loot the Treasury. They will buy at above FMV that is how they plan to recapitalize the banks WITHOUT dilution. This makes the sacking of Rome look like Sunday school. It must be stopped!!!

  6. Anonymous

    What is the purpose of a financial system? Isn’t is to allocate capital to its most efficient use? How can we achieve that by bailing out those institutions that have demonstrated their inability to do so?

    Take the $700 B and set up 7 regional banks capitalized to the tune of $100 B each. Allow them to sell shares to investors with a goal of eventually having them buy out the government at a profit. These new banks would have pristine balance sheets and could easily, along with the many sound existing banks, provide the credit the economy needs. Citi, Wachovia, WaMu et al will still have lousy balance sheets even if they dump some bad paper on the Treasury.

    Can anyone splain what’s wrong with that.

  7. Anonymous

    I have written my congressmen as well as some of the key players who are trying to stop this . I ma trying to inform people I know of the severe consequences that htis bill brings . I am ready to participate in protest marches or rallies against this ( any web links ?)

  8. Anonymous

    going to try to get the meme going that this bailout is closet privatization of social security and that social security funds are being used to bail out wall street.

  9. Murph

    The limitation on liability simply restates the existing, long-standing practice for Agency actions. Courts do not overturn Agency actions or second-guess Agency decisions. Courts limit their review to whether an Agency followed its own, states rules and guidelines.

    Agree with the plan or not, the clause that is making everyone crazy is an unremarkable restatement of current judicial practice with regard to government agencies.

  10. Anonymous

    Questions

    If Lehman was allowed to fall one day, and then AIG saved the next, and then the entire financial system the next, have policymakers decided that it would be better to inflate than deflate?

    How high could gold go if the US inflates to avoid deflation?

    How high could interest rates rise if the government is perceived to be giving away taxpayer money for bail outs?

    How low could the US dollar go if the government simply prints the money?

    If the government received about 80% of AIG equity in exchange for an $85 billion loan, is Paulson suggesting taxpayers receive nothing from bailed out banks?

    If bailed companies stocks rise, should shareholders and debt investors, including those who created the mess, reap profits from taxpayer intervention?

    How are market prices going to be determined for securities for which there is no market?

    If Treasury decides that fair prices are higher than market prices
    what should be the consequences for shareholders and debt investors
    if taxpayers effectively give financial firms money?

    Should banks pay dividends with taxpayer dollars?

    If hedge funds and foreign firms are not eligible to participate, what prevents them from selling or exchanging near worthless securities to eligible US banks to offload on to US taxpayers?
    Is legislation stating “Decisions by the Secretary…are non-reviewable…
    and may not be reviewed by any court of law or any administrative agency,”
    constitutional?

    Does bailing out the Banks & Wall Street revitalize the housing market, simulate consumer spending or increase Government Revenue?

    If the S&L bailout cost taxpayers $125 billion
    and the original estimates were somewhere between $30-50 billion
    how much could a financial institution bailout cost
    if initial estimates are $700 billion to 1.2 trillion?

    Should the USA’s debt rating be AAA?

  11. Anonymous

    I like the idea of Anonymous from 7:02. I’d rather see the Govt use its resources for a system reboot. Starting new banks would be more useful than trying to prop up failed old ones.

  12. Richard Kline

    So Murphy of 7:13, what you say is materially inaccurate even on the basis of your own terse summation. In the case of Paulson’s proposal there are, purposelly, neither Agency nor guidelines, and hence nothing whatsoever for a court to review. There is no oversight provision; quite the reverse, the proposal specifically solicts the authority for the Secretary of the Treasury to act as he sees fit, i.e. blanket immunity. The sums of money involved are distinctly _atypical_ for ‘standard Agency practice,’ to say the least. Applying the reasoning commensurate for standard practices to an extremely irregular proposal indicates a lack of engagement with the substance of the proposal.

  13. dearieme

    The last time y’all ran into a bit of a problem – 9/11 – your government fell into panic, choosing to fight a war against the wrong people in the wrong place at the wrong time. Here we go again: panic and error.

  14. tk6910

    Paulson’s brilliant proposal is: give me 700 billion dollars(for now), let me use it any way I feel is beneficial to the financial sector, and don’t hold me accountable for my actions now or ever.

    This is so ridiculous that I think Paulson is basically begging the Congress to deny his request. Then in the future Paulson can try to cover his ass by saying that he had a plan but was not given a chance to work it.

    If Congress rubber stamps this proposal, there is something grossly wrong with our government.
    The lawmakers may be trying to save their investment portfolios rather than represent the average taxpayers.

  15. tk6910

    One more thing. I found it very strange that the proposal has a section specifically giving Paulson blanket immunity from any legal accountability.

    He must be acutely aware that he is about to do something very illegal.

    If Congress allows this farce, our government is rotten to the core.

  16. Anonymous

    Yves, it was a great article.

    This “plan” is merely legalized looting of the treasury by Paulson and his cronies. Media self-censorship is preventing the critical mass of public outrage at the conditions of this bailout from developing — and forcing modifications. The politicians are afraid to resist for fear of losing the election. It’s a brilliantly timed robbery of the US Treasury.

  17. Thingumbobesquire

    For the Congress to vote for a bill which abrogates the constitutionally mandated separation of powers is prima fascie treason.

  18. Anonymous

    "This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat."

    Eloquently, perfectly stated. I hope Charley Stein at Bloomberg will quote you on this, and broadcast it worldwide … even to the primitive tribes in the desolate, fetid swamps of Foggy Bottom and the voodoo burial mound of Capitol Hill.

    Thank you also for drawing the connection to civil liberties. The essence of WW II-era fascism — as well as the nationalized US economy of 1942-1946 — was government control of production. Government control of finance can achieve the same thing, while both rewarding cronies and starving the politically unconnected for credit. Fannie and Freddie's abusive lobbying will look small-time, compared to the swarms of rent-seeking flies feasting on Hank Paulson's $700 billion pile.

    The CGFM (Criminal Gang of Fools & Madmen) in Washington has truly gone off the rails this time. But according to Alison Fitzgerald's story in Bloomberg News, the only "debate" is whether the bill should be a "clean" measure, or be festooned with other political and spending measures. "So far no leader has voiced objections to what Pelosi called the 'sweeping and unprecedented powers,' such as barring courts from reviewing actions taken by the Treasury under the measure, that Paulson is asking for," she writes.

    Horrible. Horrible. Horrible.

    All one can say, as this pending atrocity advances, is that a culture which no longer values liberty, prudence and thrift probably can't be helped. The sad thing is that the burden will be heaped onto the backs of those who are barely making it now.

    The more talented kids here need to consider emigrating after graduation, to places with more freedom and economic opportunity. This failed state has been LOOTED.

  19. Anonymous

    “The more talented kids here need to consider emigrating after graduation, to places with more freedom and economic opportunity.”

    Well, that would be nice, but there aren’t any. Game over. The thing to do is find a safe, remote community and avoid the inevitable social collapse in big cities.

  20. Anonymous

    “If Congress rubber stamps this proposal, there is something grossly wrong with our government.”

    You don’t need the qualifying phrase, TK6910. There IS something grossly wrong with our government.

    But if you insist on keeping it, I guess by Friday night (or 3 a.m. Saturday morning, when they usually pass the worst legislative atrocities by voice vote), we’ll be in complete concurrence.

    Frankly, I wonder whether the US military ever considers intervening, when the civilian authorities have demonstrated themselves incapable of governing, and have reverted to an African-style looting spree.

    Who will intervene to stop the Gang Rape of the United States?

  21. glacierpeaks

    As Congress considers the Administration's bailout initiative, I would like to offer a different proposal, based on the following assumptions:

    1) The extent of the problem regarding poor investments on Wall Street is currently not quantifiable. The $700bn figure currently being bandied about as the cost of a rescue plan appears to be more a case of illustrative language than actually based on any assessment of true exposure. Therefore, we have to realize that this “comprehensive solution” that is designed to end the piecemeal approach of the last six months may turn out to be a low estimate, and therefore not a definitive solution, but a continuation of that piecemeal approach. The Take-Away: policy makers should prepare for the worst, and hope for the best.

    2) Contagion from a sizable collapse on Wall Street would have a limited impact on global finance. While no doubt there would initially be considerable pain at a time when many economies are sluggish, outside of the US and UK the impact would be short in duration and quickly recoverable in China, Japan, France, and Germany. The Take-Away: while the value of assets in the US & UK would tumble, several other countries would still be cash-rich and asset rich.

    3) The real threat to the American economy-the shoal beneath the waters that was revealed on Wednesday-was not the collapse of high-profile firms, or the drop in the markets. It was the seizure in the banking system itself, a lack of trust and transparency, which produced an extreme flight to safety and the hoarding of cash. If not dealt with, this would have drastically reduced lending to Main Street consumers and businesses, and eventually would have interrupted payment systems. The Take-Away: the real problem is not a collapse on Wall Street itself, but the damage that would inflict on the economy of Main Street.

    4) The third rail-the difference between a major problem and an unrecoverable problem-is the status of the dollar. The US does not have the internal savings rate to sustain its own debt, and foreign banks and governments cannot be counted on to support it indefinitely. A huge outlay for a quickly put together rescue plan may spook foreign investors away from the dollar; even if they were to continue to support it, likely inflationary pressures a few years after the crisis would also damage the dollar. (Moreover, to combat inflation would require high interest rates, which would raise the cost of borrowing as well as the interest payments on pre-existing loans that have free-floating rates. That would seem to put us in a similar situation where we are now, in terms of the viability of obtaining credit.) The Take-Away: the dollar must be protected at all costs, and a large-scale rescue plan threatens the dollar.

    What emerges is a very clear choice: given limited resources imposed by a large national debt that may be unsustainable, do we want to save Wall Street, or do we want to save Main Street? To put it another way, do we want to save the Anglo-Saxon laissez-faire model and its power structure, or do we want to save the underlying American economy?

    My solution is simple: let Wall Street “own their failure”, and save Main Street through a national bank. This government-run bank would have a presence in all areas of finance, from money markets and investment banking, to consumer and business lending on Main Street. It would certainly not replace private sector banks, nor would it dominate any one sector of finance, but it would be government-run, government-owned, and perhaps most importantly, permanent. The National Bank would anchor the entire system, providing security, restoring trust, maintaining an open pipeline of consumer and business lending, and would set the norms for industry behavior. In fact, as the poster child for transparency and regulatory diligence, it would force private sector banks to prove their own trustworthiness in order to compete.

    In this scenario, Wall Street would be allowed to fail, and the market would find equilibrium. Housing mortgages and student loans would be renegotiated (between the banks that hold them, and consumers), asset values would be re-assessed, and losses absorbed. The National Bank would ensure the continuance of economic activity as other institutions take the impact and recover. Relatively modest government expenditures would be focused on funneling credit, protecting FDIC, and shoring up pension plans. With the Main Street economy thus shielded, foreign investment would surge in to take advantage of lower asset prices among industry (i.e., Detroit and the airlines may end up being foreign-owned), this investment would further stabilize the economy, and lead to growth that itself would lead to a recapitalization of Wall Street.

    I wouldn’t be surprised if a national bank actually became the de facto solution, if Congress does not pass a rescue plan, or if the $700bn cost turns out to be woefully underestimated. Indeed, with the nationalization of Fannie and Freddie, and the quasi-nationalization of AIG, you already have some of the pieces in place. If WAMU and especially Bank of America were to fail and be taken over by the government, you would essentially have an infrastructure for a national bank with a very broad and deep reach, from the exchange floor to the ATM at your local branch…it would only need to be reconstituted as one coherent entity.

    ———————————–

    OK, I stuck my chin out, swing away…tell me where the flaws are…

  22. Independent Accountant

    YS:
    “Financial coup de etat”. I love it. I have posted on the “Bloodless Coup” for months. Welcome aboard comrade. We are now in: Stalin’s Russia, Mussolini’s Italy or Chavez’s Venezuela. Pick one.
    I have a money making idea: let’s sell “Che Guevarra” t-shirts with Hank Paulson on them. Laugh! Now! Or else!

  23. Bill

    Unless paulson buys the toxic crap at lone star-merrill prices (effectively 5 cents on the dollar) this is the financial equivalent of rape of the american taxpayer by paulson and his wall street cronies.

    One ex banker friend quit goldman years ago. the trigger? the boss telling my friend they had to learn to “”look the client in the eye and lie”

    Anyone get the feeling that hank paulson is carrying on that goldman culture of dissembling and looking the us taxpayer in the eye and lying?

  24. Anonymous

    This unlimited proposal by Paulson is an opportunity for the institutions holding the bundles of bad paper to profit from them in another Ponzi scheme.

    Paulson can buy high from one institution, with taxpayer money, and sell low to another institution…Rinse and repeat. As long as the taxpayer money holds out the institutions can swap toilet paper indefinitely, profiting on each paper swap. Will the profits be used to recapitalize the banks? I doubt it. Profits will probably be used to pay large bonuses to those running the new Ponzi scheme.

    What most were thinking of as garbage paper suddenly becomes ‘valuable’ with this scheme. Truly one bank’s trash is anothers treasure. I see no limit on how long the new Ponzi scheme can continue as long as congress critters can be frightened into new cash for Paulson to continue the game. Once congress agrees to this scheme they will be loath to admit that they were wrong.

    River

  25. Anonymous

    Glacier-Your plan is pretty close to what I proposed (7:02 AM). I would prefer several Regional Banks, rather than 1 National Bank to have competition.

    By the way, it is far from the case that all existing banks are toast. There are hundreds of banks out there that followed sound, time-tested lending practices and the current interest spreads are actually gravy for them. Many of their stocks are at all-time highs (eg. USB). We need to protect them and not let the system be dragged down by the institutions that were reckless.

  26. A.S.

    We as very patriotic taxpayer at least have the naming rights to the newest and biggest 700 Billions bail-out program.

    Do you prefer:

    1. T.A.R.P. – “Troubled Assets Relief Program”;

    or

    2. C.R.A.P. – “Congressional Relief for Assets Program”???

    To fully exercise your rights as a patriotic taxpayer, you have to pick one of these names, and submit your choice to your congress-person, and senator before Asian markets open on Sunday.

  27. glacierpeaks

    Anon

    -Hey thanks for referring to that. It seems so common sense that I don’t know why its not being discussed in the MSM. Of course, the financial lobby would much rather have a bailout than being left to the market, and then subjected to tough regulation afterward…

  28. a

    How Roubini can agree with this is beyond my poor comprehension.

    By the way, did you hear the one that Barclays is paying out 2.5 billion in bonuses to Lehman employees? Am I the only one outraged by this?

    IMHO I think this is really what is wrong with those who support bailouts to keep the financial system going. The current financial system needs to disappear. It’s morally repugnant. Start new nationalized banks, keep them sensible, and pay the bankers like the bureaucrats they should be.

  29. Anonymous

    “Start new nationalized banks, keep them sensible, and pay the bankers like the bureaucrats they should be.”

    See what I mean? Game over.

  30. glacierpeaks

    a said…

    amen brother.

    And that’s nothing against the average person in the industry; a friend of mine in business school-extremely talented and just a great all around guy-worked for Lehmans…so I don’t smear an entire profession.

    But the industry model is what is out of kilter…

  31. glacierpeaks

    Krugman’s got a blog up, pointing out that if McCain wins, Gramm would be running the bailout, LOL

    You can’t make this stuff up…

  32. hbl

    We desperately need a clear, concise, and minimally inflammatory web page that summarizes the core considerations in a highly accessible way (i.e., narrower legal protection, not overpaying to inappropriate extremes unless taxpayer has clear upside, etc). Some blogger (Yves?), commentator, or savvy reader could write this. I would like to be able to email it to my congressman and email links to as many people as I know so they realize what is at stake here! Ideally there would even be a “contact your representative” feature built into the site to maximize viral usage, if any software developer can leverage something already out there. Prudent renters and homeowners who are not overextended, responsible corporate citizens with low leverage, etc, all need to realize how much this has the potential to hurt them for than necessary if not done right.

    Also I’m a bit surprised to see Roubini portrayed as supportive of this after reading his Friday blog post… I wonder if his position was correctly represented by that article?

  33. S

    A few observations:

    1. All of the auctions carried a de facto similar provision to the absolute power Paulson is seeking. In the case of the TAF, TSLF etc auctions it was anonymity and in this instance the goal is the same. What if it were to come out that BAC or JPM or WFC were dumping large swaths of their portfolios on the government? This while the shareholders are receiving thier dividend? Not politically acceptable. Hence the curtains.

    2. Paulson plans appears to be to use the $700 billion to recapitalize the national champions and let the smaller regions essentially go away (IMO), with their deposit basis going to the chosen ones so as to drive NIM expansion and faster recap.

    3. Part of this plan will include bringing the funds rate down another 100 bps at least. This will ensure that the champions will be able to continue to drive NIM expansion or at least hold the line as mortgage rates go down and balance sheets shrink/run off.

    4. Paulson knows that forcing banks to lend into a downward cycle is pro cyclical and most simply will not comply. It is a half truth or outright lie to suggest this is in any way about increasing lending. Such moves would simply add to the mounting losses as commercial and residential shrink back to sustainable levels.

    5. Forgetting house prices in Iowa for a moment, house prices in major metros on the eastern seaboard have not yet begun to feel the pain – think JPM, C, BAC here. The “prime” portfolios are going to start showing massive defaults. Merely go back an listen to Jamie Dimon say he saw prime foreclosures 4x from here. To somehow suggest thsat current prices are anywhere near reality is to offer the next generation debt enslavement. Fool me once shame on you fool me twice shame on me.

    6. Stabilizing home prices is impossible and counter productive. The Fed is pursuing a path which says lower interest rates back to negative to climb home prices back to an unsustainable equilibrium point. As we know wages do not support prices hence they must fall. Will fall back to a price whereby the home owner can look forward to at a minimum keeping pace with inflation? But wait, we have inflation in things, but deflation in wages. Ironic that as wages are deflating, notwithstanding government statistics, the government is actively working to forestall the necessary correction in home prices. Home price need to fall at a pace faster than wages are decelerating to keep any sniff of the dream alive.

    5. Much as this is ignored, the home price bubble was a massive inter generational transfer of wealth to the baby boomers. Timely I would say. It is ironic that the boomers are actively looking to put price supports in for the stock market and houses as the social security fund runs into the wall. Take the crude example of an upscale suburb in NYC – baby boomer x buys a place in suburb y in 1975 for 70,000 (price to income 1.5x). Inflation averages 3% over 30 years and cede a 2% real return. In 2008 that house is worth close to 400K (4x average wage) versus a list price of $1.5M-$2.0M (4-7x average wage). And this is upscale. Such math implies a 30 year CAGR of 10%, well ahead of inflation. Now if I were to buy today, that would imply that in 2038 the house would be worth $26M. Now all this is in the context of declining wages. Income rations suggest that house lose approx 60%-70% of its “value.”

    6. All this is to suggest the dirty secret that home prices are going no where but down for a long time and then they will stay there. Capital appreciation is over for housing and Genx and Geny need not be complicit in their own fleecing.

    7. All this math is predicated on rates staying low forever. How this happens in the context of the Fed printing money and the weary eyed buyers of US oilet I man Treasury paper leaves me miffed. Perhaps the game drags on a tad longer but the outcome is foretold.

    8. Finally, every comparison to GDP is useless. GDP is massivily inflated on the back of the decadent leverage employed in the economy. Naturally the governement will do everything tio keep this nominal bnumber growing, but the reality is the US GDP is no better than BAC balance sheet. We can pretend all we want but the truth of the matter is that as the leverage swampdrains, so goes GDP. Consequently, GDP as a divider is like beliveing peak home prices representied anything more than a figment of the collective imagination.

  34. Unscripted Thoughts

    I hate to say it…but I feel like I am watching another Hurricane approach knowing it will wreak havoc on the entire nation. I think the situation may be beyond repair (or very near it). The system has become so rotten from within and the brainiacs who tend it so morally corrupt that I think the only way out is let the damn thing collapse and start all over. Would it be painful, messy and horrific? Absolutely. But at least it would not be 'death by a thousand favors' and we could start over implementing some 21st century ideas about finance, credit & lending.

  35. ruetheday

    A common bit of advice given to job seekers is that they have the most leverage they will ever have, in terms of negotiating comp, prior to accepting the position. Once you accept the job, your bargaining power for future raises is limited.

    The Treasury needs to take heed. They are in a position to extract real concessions from Wall Street RIGHT NOW because they have something the street wants and needs. Once the $700 billion package is signed, that power slips away. Do not allow yourselves to be pressured into writing the check for the bailout now, with promises for reform tomorrow, as tomorrow will never come.

  36. Anonymous

    Aside from Shakespeare (who knows why) my favorite read when I was young , other than the comic books and sci fi stuff, was Sherlock Holmes.

    I would say that in addition to the Socrates’s dialectic, opposing viewpoints to distill the pure ‘form’ ,that the Holmes technique of elimination of all possible motives until you cannot eliminate thus revealing the truth – as outlandish as it may appear to be – is in many ways the defining ‘gutcheck’, ‘mental path’ etc. that I have taken in this life.

    Sometimes it is difficult to see the significance of an historical event when it is happening around you.

    I believe, however that right now and right here what is occurring will effect us, our children, and perhaps our children’s children more so than any event I have been witness to heretofore.

    Section 8 of the Treasury fact sheet that was leaked, purposely of course, over the weekend literally gives dictatorial powers to the Treasury Secretary to have full access to the resources of this United States of America ( a $700,000,000,000 revolver line) to dispose of in the manner and fashion that he, Trader Hank, deems to be necessary in consultation with Chairman Ben with NO CONGRESSIONAL OR LEGAL OVERSIGHT WHATSOEVER.

    In other words the Constitution doesn’t apply here…..

    Take it away Holmes…

    HOLMES: So tell me Watson why would our elected leaders abdicate their authority to an appointed position?

    WATSON: Merely a redistribution of wealth to the rich. A taxpayer handout for bad speculative bets.

    HOLMES: My dear Watson, the rich have taken care of their brethren for years but they do so in a way that does not draw attention, the integrity of the system is based on confidence, confidence on the transparency of the process and the markets .. the invisible hand as it were. Clearly Holmes much more is afoot. This is visible, the language is explicit.

    WATSON: What are you saying Holmes?

    HOLMES: When bailouts occurred in the past, companies went bust, the government assumed the loans, worked them out, and grabbed the assets. This is a preemptive bailout, to seize the loans before the companies go bust.

    WATSON: I don’t see where you are going with this…

    HOLMES: My dear Watson if it were a company, or several companies, that posed systemic risk we would simply wipe out the commons and preferred and then go up the capital structure and equitize until future equity participants either saw economies of scale or saw the need to break up the entity into smaller pieces. Perhaps the government would take a convertible debenture position, or equity participant notes , warrants etc.. as in previous bailouts so that there would in some situations be a return on the government’s investments as the entity is put into some form of run-off. The process would be transparent in that taxpayers would know how their money was being spent, as in previous crises….

    WATSON: But this plan mentions none of this…

    HOLMES: No it does not.

    WATSON: So the process has been entirely hijacked by the rich elites and they no longer feel the need to hide their..

    HOLMES : Watson don’t be a fool. The master cat burglar does not reveal his hand in his later years if anything his methods become even more challenging to discern… no Watson my dear friend overconfidence in their ability to confiscate wealth is not what is occurring … quite the opposite my friend….

    WATSON: I don’t understand….

    HOLMES: My dear Watson when Hank and Ben gathered all the senators in the chambers and told their aides to leave the room, an occurrence usually done only relative to top-secret national security matters, they, as further communicated by Senators such as Dodd and Schumer used words that ‘ in our 25 years we have never heard come out of the mouths of our leaders’. We can surmise dear Watson that the gravity of the problem necessitates no transparency, that the gravity necessitates no Congressional overview or Constitutional check and balance, we can surmise given the proposed solution to the problem – absolute authority and access to all resources – that the problem is not a liquidity problem within selected companies that pose systemic risk, that the problem is not a solvency problem within selected companies, that we can never know why this money really needs to be spent or how it will be spent because the problem is dear Watson…

    WATSON: Yes Holmes….

    HOLMES: The problem my dear Watson is that the system is in fact insolvent..

    WATSON: My god Holmes then that means..

    HOLMES: Yes my dear friend… we are all subprime now…..

  37. Ricky Ricardo

    The debate is being framed (Paulson on ABC) as between doing nothing (catastrophe) or this proposal. It is not, or should not be. The choice is to do something useful, like public national or regional banks and strengthening private banks that have acted responsibly or to throw more money down the rat hole of those who have acted irresponsibly.

  38. Anonymous

    Mad at the TPTB, withdraw your cash. Bank holiday, maybe they’ll take time to listen and think. More likely they’ll tell everyone they can’t have most of their cash. That will get a few people into the streets. Come serious inflation we’ll need to spend it rather than save it; maybe a bank isn’t the safest place for it anymore – it encourages abuse.

  39. Amnon Portugaly

    A great article

    Re: Sec. 8. Review.
    “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.”

    On March 23, 1933 the newly elected Reichstag met in Berlin to consider passing Hitler’s Enabling Act. It was officially called the “Law for Removing the Distress of the People and the Reich.” It would hand-over all its power to the Chancellor Adolf Hitler, in effect vote democracy out of existence in Germany and establish the legal dictatorship of Adolf Hitler. Before the vote, Hitler made a speech in which he pledged to use restraint. He also promised an end to unemployment and pledged to promote peace with France, Great Britain and the Soviet Union. But in order to do all this, Hitler said, he first needed the Enabling Act.
    The rest is History

  40. LJR

    Richard Kline has stopped speaking in tongues! This is definitely not a good sign.

    I love all of Richard’s comments so please don’t take offense. Just pointing out that he seldom descends from his “systems” POV to talk like the rest of us. No harm in that either. His POV is refreshing and many of his points are worth serious consideration. Or at least they would be if we weren’t living in a world where power is held by the likes of Hank Paulson.

    Paulson is a hack with a string of immediate failures now asking for a bigger gun. Not just a bigger gun but a NUCLEAR weapon. And then he wants total immunity from any harm he may cause by shooting it. He speaks the vocabulary of crude violence. The man is without grace, intellect or capacity for nuance. In the world of jocks and quants he’s the alpha jock. You can smell him when he walks in the room.

    This man wants non-recourse spending authority for $700 BILLION dollars. He could spend it on a lap dance if he wished and no one could call him to court. How many cronies can Hank Paulson save with that kind of money? Let’s not forget his origins when you ask whether he’d dole out favors to friends.

    I’m physically upset by all this. Hard to sleep. I try to keep myself occupied with small projects around the house. Even for a grizzled old cynic this is a bitter “bazooka” of reality. Classic “smoke-filled room” tactics from the most corrupt administration in our history. I can hear Dick Cheney chortling, “Way to go Hank! I thought I was doing well with Halliburton but you’ve just put me to shame.”

    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.

    Note the document says the transactions are confidential and not subject to any kind of review – judicial or administrative. Get your head wrapped around that. This is language of criminality writ large. An agency is being created in the image of Hank Paulson, funded with more money than spent in the Iraq war and given carte blanche to “save the financial universe” with no review process. Just Hank standing in front of a long line of cronies with their hands held out.

    What kind of human being would have the chutzpah to even WRITE this kind of rubbish? Surely not the kind we’d want acting as the richest man in the known universe.

    If I were twenty years younger I’d be packing my bags instead of bitching about something outside my control. There are places that stand a much better chance of remaining civilized

  41. Aron Roberts

    Both Paulson and Bernanke are said to be running on fumes – deeply stressed, heavily-sleep deprived, and apparently fueled these days by chain-drinking Diet Coke and Diet Dr. Pepper, respectively.

    Caffeine content of diet soft drinks:

    http://www.wilstar.com/caffeine.htm

    While one can empathize with what they are going through, this does not lend itself to a well-thought-out rescue plan :-):

    Peter Baker
    “A Professor and a Banker Bury Old Dogma on Markets”
    New York Times, September 20, 2008
    http://www.nytimes.com/2008/09/21/business/21paulson.html
    (access to this article may require no-cost registration on nytimes.com)

    “Mr. Paulson has powered through the long days with a steady infusion of Diet Coke. Asked twice to testify by the Senate last week, he begged off. ‘He told me he had like four hours of sleep,’ said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking Committee.”

    “The improvisational nature of their [Paulson's and Bernanke's] effort has turned President Bush and Congressional Democrats into virtual bystanders, sometimes uncertain about what comes next and left to wonder about the new power dynamics in the capital. Seemingly every time lawmakers tried to get a handle on what was happening and what role they might play with elections around the corner, Mr. Paulson and Mr. Bernanke would show up again on Capitol Hill for another evening meeting with another surprise development.”

    Perhaps because they were so addled, the ‘perpetual $700 billion’ bailout plan, giving the Treasury Secretary unprecedented powers, was being improvised by the minute:

    Joe Nocera
    “Hoping a Hail Mary Pass Connects”
    New York Times, September 20, 2008
    http://www.nytimes.com/2008/09/20/business/20nocera.html?ref=business

    (A highly recommended article!)

    “It is a weird tribute to the scale of this crisis that Mr. Paulson felt he had no choice but to rush this proposal out, because as the day progressed it became increasingly clear that the Treasury Department didn’t yet know how this mechanism was going to work.”

  42. Matthew Dubuque

    Matthew Dubuque

    Very nice work Yves. Reminds me of the scores of IMF hostage negotiations I have seen over the years, where entire nations are taken hostage and their alleged democracies are given ultimatums in a take it or leave it fashion.

    And Rogoff, in his stint at the IMF, is very well aware of this process.

    Recall that senior Bush aides were quoted a few years back as stating that a financial crisis would “help” in pushing their radical agenda to privatize social security, giving Goldman and Morgan Stanley tens of billions in revenue managing the assets.

    This is obviously coming soon.

    WHAT WE NEED HERE is a WORST CASE SCENARIO.

    All we have been presented is the inane rosy scenarios of those giving the ultimatums to the Congress.

    In order to make an INFORMED decision, we need NOT ONLY the BEST CASE SCENARIOS (i.e. where the taxpayer makes a profit) we need to have the COURAGE to examine the worst case scenarios.

    Analyzing WORST CASE SCENARIOS is an essential component of effective crisis management.

    Only then can we make a rational choice. This hastily conceived plan with its obvious serious shortcomings may not do the trick.

    We need to think it through like grownups. We don’t have many more chances to get it right.

    Matthew Dubuque

  43. Independent Accountant

    AS:
    You’re decades late. CRAP stands for “Cleverly Rigged Accounting Ploys”. Try again!

  44. H-Ross Parrot

    Now, before I get started, I just want to clear one thing up: a lot of people keep talking about how this is Socialism. This is a major and serious misconception. See, with Socialism, you get things like, for example, Socialised Medicine (notice the “Socialised” in “Socialised Medicine”, which is a clue in case y’all are wondering).

    OK now stay with me here, people. Here’s the hard part, so take a deep breath first: with Socialism, you fork over a whole bunch of yer money to Big Government, and in return, you get things like Health, Education and Welfare (which has a ring to it, don’t it? Health, Education and Welfare).

    OK now, I know that was hard, but stay with me here: in America you give a whole bunch of money to Big Government, and you get basically nothing in return, or maybe ten cents on the dollar or something. You sure as heck don’t get Health or Education, and the Corporations make out better on the Welfare angle than anyone else.

    So all these bailouts and such and letting Hank declare himself a God are not socialism, because all y’all will get in return is a whole extra big pile of debt (which will be defaulted on anyway so you don’t really need to worry about that except for when all your money also becomes worthless afterwards and a single Freedom Fry in France will cost you one hundred million dollars or just a pound of any other recyclable paper.

    OK now, are y’all still with me? Any questions? Y’all get the Not Socialism part?
    The basic message remains the same:

    Obey!

    In other news:

    See here, now, it’s just like I said:

    Alien Banksters!

    He talks about other stuff too, but trust me on this, Alien Banksters are behind it.


    ….
    What happened on September 18-19 took years of preparation, capped by a faux ideology crafted by public-relations think tanks to be broadcast under emergency conditions to panic Congress – and voters – right before the presidential election. This seems to be our September election surprise. Under staged crisis conditions, Pres. Bush and Treasury Secretary Paulson are now calling for the country to come together in a War on Defaulting Homeowners. This is said to be the only hope to “save the system.” (What system is this? Not industrial capitalism, or even banking as we know it.) The largest transformation of America’s financial system since the Great Depression has been compressed into just two weeks, starting with the doubling of America’s national debt on September 7 with the nationalization of Fannie Mae and Freddie Mac…..

  45. VoiceFromTheWilderness

    Thanks for this very informative piece. What would we do without you?

    One thing I’d like to add though: Throughout the last 10 years, maybe longer we have seen a situation in which ‘the conversation’ is dominated by the ‘facts’, and ‘issues’ deemed relevent by the administration. It shouldn’t be a great surprise that the conclusions then come out precisely how they want them too (see the Iraq War for details). This conversation is no different.

    What is really startling is that at no point is anyone who has responsibility for dealing with financial markets talking about leverage. They didn’t talk about it in the run up to the problem, and they aren’t talking about it now. But leverage is the real problem.

    The reality is that ‘banks’ have been using essentially fake numbers for the assets for quite some time now. The reason we have a problem now, instead of last jan or whenever, is because they are no longer able to pay their creditors. The idea that ‘the real problem’ is the valuation of their assets simply ignores the fact that these corporations are massively overleveraged. AIG isn’t an insurance business. They own an insurance business, but what they are is a hedge fund, a massively over leveraged hedge fund.

    If the financial press continues to allow the administration and the corporations that have problems to define the terms, the public will never understand what is going on, and the wrong solutions will propogate. Congress too is responsible for looking at these issues correctly.

    Instead however we have a situation in which the reality is completely masked by the words used. This action isn’t a ‘bailout of the banks’. It’s use of government funds to artificially inflate the assets of hedge funds, thus forestalling the problems induced by their massive over-leverage. But there is no question that if they are allowed to continue to run arbitrarily high debt to captital ratios, sooner or later, regardless of asset inflation, we will have an even worse financial disaster.

    Funny how no one is talking about the avowed plan of the Republican Party: To Drown the Government of the United States in the bathtub.

    Think that plan is working well?

  46. Anonymous

    I haven’t been paid my 1000 in unemployment claims by NY state for the last 6 months.

    Here the Treasury secy, Fed Chairman and House Finance committee chairman have all blackmailed the president into bailing out the thieves.

    Of course, if we don’t bail them out, the world will end.

    Really, USA’s priorities are weird.

    Bail them.
    Then Jail them.

    That way they won’t do anymore damage.

  47. Anonymous

    Here starts fascism in America.

    Anyone with power to blackmail the innocent will do so.

    The government is an agent of the blackmailers.

    You pay taxes to the blackmailers.

    The only way out is to stop paying taxes to feed this beast.

  48. Abbott_Of_Iona

    Sec. 2. Purchases of Mortgage-Related Assets.

    Subsection (3)

    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;

    Section 2(3)

    Combined with

    Sec. 8. Review.

    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.

    make it clear that this is not about the immediate problem of a lack of liquidity (confidence) between banks.

    The Secretary can “designate” ANY FINANCIAL INSTITUTION and FORCE them to his will WITOUT judicial oversight.

    Questions

    Why would any person/insttitution outside of the USA hold any $ demoninated assets, given that the Secretary can quite literally do with them as he pleases?

    Has Hank Paulson not effectively just killed the US Stock, Bond and Money Markets STONE DEAD?

  49. Anonymous

    Paulson is stealing billions from the American taxpayer to recapitalize an entirely bankrupt US banking system to benefit his crony buddies on Wall Street. There is no conincidence that he acted once it was apparent that his firm (Goldman Sachs) was going under. Let Lehman fail but not GS. No matter has many lies Paulson says that he is “paying fair market prices”, he cannot do it. If the mortgages were worth what the banks are carrying them for on their books, then there would be no crisis. Banks would be solvent and no one would be concerned. But that is not the case. All US banks are insolvent, and that is what investors have figured out (which is why the stock market is crashing). Banks cannot sell the mortgages for what they are really worth because that would immediately expose their insolvency. Therefore, Paulson cannot buy the mortgages for what they are really worth because that would immediately expose the insolvency of all banks. Paulson has to pay above fair value and stick the US taxpayer with the cost while the banks get to reap all the upside. The US economy is in a death spiral now that the foreigners (our creditors) have figured out that the US is a rigged con game.

  50. letterhead

    As someone who works in PR for financial services companies, I’d suggest that you have to understand everything Paulson does from a psychological perspective.

    Let’s not forget where Paulson came from… according to an article on Bloomberg last November 5, 2007…

    “Goldman ranks 10th among 118 issuers, based on the amount of subprime loans still on the market. Bonds with a face value of $484.6 billion remain from those created in the years Paulson ran Goldman.”

    Paulson is first and foremost… a whale. And he sees the “market” from that perspective. To him, he and his cronies ARE the market.

    His first and biggest obligation to ensure “liquidity” will be to make sure these “markets” are liquid… no matter what unreasonable and unsound actions are required to get there.

    Here is a different suggestion for dealing with the “market”… BRING BACK THE GUILLOTINE!

    (OK hyperbole to be sure… but like most people I am rip snorting mad!!)

  51. Anonymous

    Wow, that’s a lot of comments.

    I have serious disagreements with Naomi Klein and her work, but the basic premise of the Shock Doctrine seems to have been given another piece of strong evidence. They waited for a crisis and then used it to usurp power and do something the masses clearly would not want if it were fully disclosed.

  52. fred55

    check calculated risk.

    reports that paulson and treasury acknowledge that this extends to purchases of any asset of any kind from any foreign entity.

    no joke.

  53. Anonymous

    Could great men thunder
    As Jove himself does, Jove would ne’er be quiet,
    For every pelting, petty officer
    Would use his heaven for thunder;
    Nothing but thunder! Merciful Heaven,
    Thou rather with thy sharp and sulphurous bolt
    Split’st the unwedgeable and gnarled oak
    Than the soft myrtle: but man, proud man,
    Drest in a little brief authority,
    Most ignorant of what he’s most assured,
    His glassy essence, like an angry ape,
    Plays such fantastic tricks before high heaven
    As make the angels weep; who, with our spleens,
    Would all themselves laugh mortal.

    -Measure for Measure

  54. 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?

  55. Anonymous

    Yves,

    More links for you, Politico even quoted you and mentioned you by name.

    Politico reports that Backlash against Paulson plan is growing: http://www.politico.com/news/stories/0908/13689.html

    Australia imposes ban on short-selling of all stocks (not just financial stocks): http://www.theaustralian.news.com.au/story/0,25197,24381568-601,00.html

    Univ of Chicago Prof opposes Paulson bailout: http://faculty.chicagogsb.edu/luigi.zingales/Why_Paulson_is_wrong.pdf

  56. Anonymous

    Another logical flaw in the Paulson plan is once the assets have been redeemed by the TARP and the banks are [temporarily] solvent, the worst offenders are still 30:1 leveraged, and running their balance sheets with short term financing (repo agreements, commercial paper, notes, etc.).

    That capital structure is not sustainable, b/c private lenders, especially foreign banks who have just been hurt by Lehman and their exclusion from the TARP, aren’t going to continue to provide money to finance the liability side of the banks’ balance sheet.

    So the new liquidity, provided by treasury, is going to be used to de-lever the banks’ balance sheet, not create new loans to consumers.

    There’s no outcome, either with or without Paulson’s plan that results in Treasury’s objectives: specifically a return to higher levels of leverage and credit.

    Its an intensely dishonest and poorly conceived plan.

  57. Anonymous

    Great post except for the lurch into political propaganda regarding the “war on terror”. FYI, every american president in every war has spied on foreign nationals who may be associated to whoever we were fighting. If the consitution prevented this, nobody noticed during the last 230 years. The theory that the constitution provides the same protection to stateless unlawful combatants as to US citizens is a novel legal theory. If you disagree with it, it does not mean you are trying to evade the restraints of the constitution … In my opinion the blog is more interesting without the over the top poliltical propaganda.

  58. Anonymous

    People shouldn’t refer to Paulson’s bailouts as “socialism”. They are crisis profiteering, pure and simple. Historically, crisis profiteering occured in wars, when military contractors overcharged the government for profit. Paulson’s plan is no different.

    The Paulson proposal is a boldly dishonest attempt to help banks pay off their debts, but as noted above, Paulson’s plan does nothing to help them make new loans to main street. This either forces banks to lend less or lever up and engage in more speculative investments.

  59. Anonymous

    “On March 23, 1933 the newly elected Reichstag met in Berlin to consider passing Hitler’s Enabling Act. It was officially called the ‘Law for Removing the Distress of the People and the Reich.’” — amnon portugaly

    Righto. And on September 26, 2008 the Kongress met in Washington to consider passing Bush’s Enabling Act. It was officially called the “Law for Removing the Distress of the People and the RICH.”

    This is the biggest event that’s happened since the New Deal (also in 1933). But it’s a REVERSE New Deal, designed to restore Porsches and Park Avenue palaces to plutocrats, by grinding the faces of the poor and the laborers, unto the hundredth generation.

    F.A. Hayek used to claim that socialism is inherently elitist, since a cadre of planners must always arise to run it on behalf of the “people.” Bush’s Enabling Act, by contrast, is Bizarro World socialism, elitist on its face. The middle class is to be mulcted for $700 billion, which they are informed in advance will be wasted on purchasing worthless garbage.

    How is it that KongressKlowns, who got suckered by the Patriot Act, and suckered yet again by the false premises of the Iraq War, can get suckered for a third time in a mere seven years?

    Obviously, the private players in the socialized financial system are going to lavish them with campaign contributions. But frankly, that’s small potatoes.

    I am 100% serious in suggesting that the unwritten terms of this deal involve creating overseas numbered bank deposits, in a hard currency, for KongressKlowns who get with the program.

    Massive bribery is the Occam’s Razor explanation for this obscene, monumental theft. And if this isn’t correct yet, be assured that it will be in short order.

    Not only are we all subprime now (as the excellent colloquy between Holmes and Watson concluded) … but also, we’re all paying Mafia protection money. Not for any benefit, but rather just to avoid getting kneecapped and having our kids’ throats slit. Let freedumb frickin’ ring!

  60. David Heigham

    There was (and is) a market need for a credible, realistic plan, sometime, to deal with the overhang of hashed-up dubious debt instruments. For the long term health of the markets, that plan had (and has) to make the holders of those instruments suffer. We now have the promise of the use of taxpayer’s credit for a large part of that purpose; but no plan of how, when and where to use it. This is a recipe for building market frenzy driven by rumors of what Paulson will do.

    That sort of frenzy might have been prefereable to market panic. However, although market panic was still possible on 19th September; Thursday 18th had ended with a feeling that the market had touched bottom. Short sellers had had their fingers burnt (the AIG and HBOS takeover terms). Morgan Stanley had signalled that they were going to bite the bullet and raise new capital from those that have it; a signal the other banks would be expected to follow. That is to say the fundamental problem of lack of bank capital was being addressed at last. Friday morning seemed a good time to make reassuring noises – to say for example that the Treasury and the Fed saw the possibility of putting to Congress, in due course, a plan to deal with the dodgy debt instruments; when the detail had been worked through. However Friday morning with its possibility of the markets calming down was a plain stupid moment to pledge the US Government to do great and magnificent things, the nature of which shall appear hereafter.

    Perhaps Paulson, Bernabeke and co were too over-tired, over caffeined or too halucinated by the early hours of Friday to remember that it is usually a good idea to sleep upon it.
    I can only suppose that

  61. Anonymous

    Senators Jim Bunning (R-Ky) and Bernie Sanders (D-Vt) announced that they oppose Paulson’s bailout plan. http://www.ohio.com/business/28821594.html

    Write to your senators and Congress people to oppose the legislation. If 41 Senators oppose Paulson’s bailout plan, they can filibuster against the plan and prevent it from passing. It takes 60 votes to override a filibuster.

  62. Francois

    “But here is the truly offensive section of an overreaching piece of legislation:

    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.”

    Offensive? You meant “expected” right?

    The whole thing fits perfectly the dominant pattern of this Administration. There is a crisis, calls for bi-partisanship, (while the normal modus operandi is wedge politics) then try to cram a plan which, oh surprise!, contain sweeping powers for the Administration. Of course, we are told “trust us”, no discussion. If by happenstance, some questioning the wisdom of said plan, they are branded as political opportunists, “unpatriotic” etc.

  63. d'zoner

    In secret, totally at our discretion and unreviewable by the courts.

    Paulson – I see here your hedge fund only steered 60% of your political donations to the republicans last quarter

  64. d'zoner

    In secret, totally at our discretion and unreviewable by the courts.

    Paulson – I see here your hedge fund only steered 60% of your political donations to the republicans last quarter

  65. Shawn H

    No different than the government using war to implement restrictive control over its people, Hank has used the thread of financial meltdown to gain personal unlimited power over the treasury coffers. First he lets the regional banks tank to get some power, then he lets the GSEs almost fail to get more power, now he lets money markets fail and has finally gained unlimited powers.

    “The last act of a corrupt government is to loot the treasury”

    Who better to execute this plan than the CEO of Goldman Sachs?

    “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.”

    Hank Paulson has unlimited, “non-reviewable” control of the United States Treasury. I never thought I’d see the day.

  66. Anonymous

    The good news for conservative crowd is that, at end of this, the Federal Government WILL be small enough to drown in the bathtub.

    It will also bring back the extended family as all generations move into same house to survive.

    Ron Paul’s wishes to bring our troops home, end the war, limit role of government, return to fiscal sanity, move to hard currency from fiat money, and so forth should finally happen.

  67. Anonymous

    SECRECY SECRECY SECRECY

    From Paulson “Decisions … may not be reviewed by any court of law or any administrative agency.”

    The circle closes on the 2000 Bush/Cheney coup d’tet.The inevitable dictator has shown up. Have you noticed?

    And when the international community doesn’t fall in line and does a workaround where real markets will prevail -well we have a socialist military industrial complex to deal with that.

    October surprise anyone?

    Postponement of real market correction a win-win for the administration -blame it on Democrats should they win.

  68. njdoc

    Sunday, September 21, 2008
    Wall Street Perestroika
    A Fait a Compli

    Having watched the Sunday talk shows, it is obvious that the Wall Street Debt Reduction Plan is a done deal, with only minor detail to be discussed. I am not sure how to feel about it. But probably it is somewhere between bewilderment and incredulousness. Chutzpah, properly defined, is killing your parents and looking for sympathy that you have become an orphan. The one thing that this plan does not lack is chutzpah. The thieves on Wall Street have designed this plan so that they can improve their balance sheet, and in effect cover their losses on bad bets. Paulson will have absolute authority over the plan, and they will be able to buy instruments from foreign banks as well as commercial real estate paper. So the taxpayer has the added benefit of assisting his banker friends abroad and our Donald Trumps at home. This plan reminds me of another ambitious reform program. When Mikhail Gorbachev came to power, he knew that communism was not sustainable, and he believed it could be saved by a few reforms of the system, Perestroika and Glasnost (Rebuilding and Openness). The problem was that communism itself was a flawed system, and no amount of Perestroika could save it. The Soviet Union (and Russia today) had no finished product to sell abroad, and its collectivized farm system was unable to produce enough food for its population. It was completely reliant on oil exports to fund its ability to feed the masses, and when oil prices collapsed, it took out the USSR, despite all the attempts by the cronies to keep it propped up. So, as I look upon the landscape today, I see that Mr. Paulson is attempting a Wall Street Perestroika, so that the system can be saved!?!? However, one needs to ask a fundamental question, i.e. can our economic system, as currently designed, be saved? The parallels are frightening. As the USSR was dependant on oil exports to stay afloat, so to the USA is dependant on capital exports (treasuries/gse/mbs/derivatives etc…) to stay afloat. So just as a collapse of oil prices in the 80’s squeezed the USSR out of business, the last thing that the USA can tolerate is a new “price discovery’ on our capital exports. Because we are completely dependant on external powers to finance our budget and thus run our country is the reason why I believe these extraordinary measures are being undertaken. But just as Perestroika of the USSR failed because it was unsustainable, Wall Street’s Perestroika will probably fail. Adam Smith said that no country that has ever run up a large foreign debt has ever paid it back. I think that when foreigners understand that we do not have the capacity to pay back our debts, and that we are going to have to inflate our way our of our debt, they will pull the plug on the current finance agreements and in effect destroy the dollar’s standing as the world’s reserve currency. This may lead to the collapse of our whole economic system, despite Mr. Paulson’s best efforts to prop up the oligarchs.

  69. Shawn H

    Everyone is saying this bailout is limited to $700B. IT IS NOT. The treasury can hold up to $700B at one time. But Hank buys $1B in mortgages at par from his buddies, then sells them back at $500M. The fund has just made $500M profit, and the Treasury still holds no mortgages. It simply has a $500M loss, but still has the authority to buy $700B in mortgages.

    There is no provision to limit losses. Losses could hit $50T with no recourse.

  70. Anonymous

    The Democrats are so incompetent. It is no wonder they always get run over. The number one priority in negotiating a agreement should always be “taking control of the document.” They should never have let Treasury frame these issues or deliver the first draft. Now the Democrats are being accused of “playing games.” Of course, this type of accusation is *always* meaningless, because when compromise is necessary, *both* parties are necessarily “playing games.” When one side says “stop playing games,” that can only be interpreted as “do it exactly how I want.” We have truly lost control of this country, and the power of the plutocracy is rampaging without limits. Everyone calls me a pessimist and negative, but even I never thought that ultimate bailout (I definitely knew one was coming) would be so horrific.

  71. Anonymous

    Followinging Roubini for a long time time and ing no evidence he supports this plan.

    Everything is being manipulated and we are blindsided by fearing that if we see a conspiracy we have to question our own sanity.

    Events of the last 12 years beginning with the Clinton impeachment could not have occurred without newspaper news control.

    Notice Murdoch’s comments in the WSJ and again on TV news that neither candidate for the presidency is qualified on the economy. I think that leaves us with a dictator -Paulson for the new communist regime.

  72. Anonymous

    This plan came out exactly one day after Goldman Sachs fell below $100 share (touched $88/share briefly). Coincidence? I don’t think so.

  73. Robert Blacher

    Every time you make a sale through a brokerage house, you pay an SEC fee of 7 cents or so.

    Why shouldn’t the current bailout of the financial industry be paid for by those who use their services through the imposition of a fee? If $1.00 (for example) were added to every brokerage transaction, the program would (eventually) pay for itself, rather than be added as a permanent part of the national debt.

    I urge you to consider this proposal.

    Robert S. Blacher
    Lake Worth, FL
    (just an individual investor)

  74. Ricky Ricardo

    There was a crisis on Wed/Thurs, namely the failure of money markets and the “breaking of the buck” by a few funds. You can bet that got the attention of Congress. However, that was dealt with by the Treasury insuring money market deposits and the run stopped. As for the rest, they can take a little time to devise a sound plan that will do the least possible damage. If need be, in the interim, suspend mark-to-market accounting until there is a plan. We can all live with the banks limping along for a few months without marking down their assets. Not much point in marking to market anyway when there is no market.

  75. DownSouth

    Yves,

    I’m in total agreement.

    I contacted my congressman and both senators and asked them to please vote against this travesty.

    I don’t know what else to do.

    I truly believe I’m seeing my beautiful country being slowly, systematically and deliberately destroyed.

    Can you imagine telling the kids and grand kids that it was on our watch, that it was our generation, that American democracy slip away?

  76. Abbott_Of_Iona

    Executive Order 12631–Working Group on Financial Markets – Mar. 18, 1988 – Established by President Regan

    Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:
    (1) the Secretary of the Treasury, or his designee;
    (2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee;
    (3) the Chairman of the Securities and Exchange Commission, or his designee; and
    (4) the Chairman of the Commodity Futures Trading Commission, or her designee.
    (b) The Secretary of the Treasury, or his designee, shall be the Chairman of the Working Group.

    “By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

    Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and maintaining investor confidence”

    Can we take it that the Working Group on Financial Markets has been a complete failure?

    Have not all of its members failed?

  77. JCC

    You raise some excellent points, but I think that we need to look deeper. Unquestionably we need regulatory reform, but this is not a republican strength. Unquestionably we need accountability, and should add it to the resulting legislation.

    But we are in the midst of the greatest transfer of wealth every from the US to other countries. This is due to price paid for both oil and other goods and services. We have changed from a manufacturing lead to a finance lead in the economy, which is a long term recipe for failure.

    How we stem the transfer of wealth to foreign shores is not a simple problem. It will require a broader look at our economy and the history of fallen powers. This will not be solved in today’s environment.

    The most that we can hope for today is a package to enable us to go forward into the next administration. I hope, but doubt that they will have the wisdom to navigate through this mine filled environment.

  78. Screaming Buy

    I’m not sure anyone here quite gets it, although the guy who said Hank’s heart is in the right place comes close.

    What he is asking for (and what he will get) is a hedge fund with $700B in capitalization and infinite leverage. In addition, he wants to be able to break the SEC regulations at will.

    The goal is to shore up the banking system at all costs. Any other asset class is ripe for manipulation to serve this objective.

    The people who benefit most from this blatant market manipulation will be Friends of Hank, and enemies of the administration beware.

    He will be able to drain the money out of your brokerage account by shorting all the assets you’re long on, and squeezing all the assets you’re short on. If you’re on margin, the process will just be that much more quick. It’s not going to be a taxpayer-funded bailout, it’s going to be an investor- and trader- funded bailout.

    This is no longer an investor’s market because the traditional metrics for investing do not apply. This is a trader’s market. And the only way you’ll be sure to make money as a trader is to have what Hank wants, when he wants it.

    Have fun. I’m switching to cash until all the fireworks are over.

  79. Anonymous

    Bank Holiday

    I think it might happen tomorrow, or maybe even tonight. After 911 they had one for almost a week, who knows at this point. I would say 6pm, or the open of the Australian market will tell all of us, right now I give it a 50/50 chance of opening.

    I think this must have been part of a larger plan, all of the sudden the presidential campaign circus get sent into the wall st tent.

    I love the “choice” that is being given, support this bailout, or you are un-american.

    Bailout, washing dc accounting rules.

    1. buy at “market prices”. add 50% to what anyone else would pay for it, at least.

    2. sell it for “market” prices, which are going to be less than what you bought it for, no one wants it now, why would they agree to let the gov’t get int he middle and take anything out if it.

    3. Make sure that the treasury is sufficiently outsourced, and make sure that these are long contracts, could be a while before anyone recognizes the genius of these people, they need jobs in the mean time.

    4. Put uniforms on every man woman and child, this is the definition of fascism. The people exist for the benefit of the corporate state, be happy with what you get.

  80. Anonymous

    Why not rescind the Bush tax cuts to help pay for this proposal? I mean, if we are *really* facing catastrophe….

  81. Anonymous

    September 21, 2008

    Listen up dudes and dudettes (surfer talk), you’re speaking your outrage like it’s an objection to those new fangled gasoline driven things scaring your horses. Wake up! We have been in a Federal state of administration by men, rather than law, for years now that does go back beyond Bush Jr… What we’re seeing today is only an extension of administration “by men” carried from the absurd to the sublime.
    As a committed non-violent anarchist I would shyly suggest that what’s going on now may be the opportunity to “break the system” so we can return to the roots of our “sacred” Declaration of Independence, Constitution, and Bill of Rights. Anybody got any ideas?

    Earl
    PS: Just built a White House, Cabinet, and Fed. Res. sand castle on the beach and then pulverized it with my shovel. Boy did that feel good, dude!

  82. ruetheday

    screaming buy – That is a good way of describing it (Paulson’t private hedge fund). Paulson has basically said give me $700B and two years time and we’ll ride the storm out and then everything will be ok.

  83. Sanjay

    Am I wrong but as I read it the proposed legislation, it doesn’t require the Treasury to purchase at fair market value. Only that the taxpayer be protected. Paulson has already said that the cost of the bailout will be less than the alternative so by his definition the tax payer is already protected by virtue of the bailout.

    BTW anybody know how many shares of Goldman Sachs Paulson still owns?

  84. pinkpackrat

    what an informed and meaty piece. Now the government has in effect nationalized the financial industry and as they’ve been down in the basement of the Treasury printing money for the last decade or so, we can expect all hell to break loose soon. Paulson was on all three news shows this morning, beating the drum and calming nerves, but faasten your seat belts. The fun is just beginning.

  85. Anonymous

    Consider the Supreme Court decision that entitles every person to own firearms. Corporations are persons, ergo: no controls on heavily armed and ubiquitous corporate militias.

    The Supreme Court is on the side of the coup d’etat.

    Nothing now is unthinkable. We need to put it all on the table.

    This regime is capable of anything. Paulson is the fox in the chicken coup who caused the problem in the first place with Goldman, Sachs and the other larges investment banks trading with an exception to capital requirement rules. They got 40-1 while everyone else had to struggle along on 12-1.

    Paulson has no record of public service and it shows.

  86. Anonymous

    September 21, 2008

    No I don’t know how many shares of Goldman Paulson still owns, but I think it would be safe to take a play out of Dick Cheney’s “book”. He has repeated for years that he has “no further financial interest in Halliburton” and then adds parenthetically “except for a deferred retirement compensation plan” you know the kind “everyone” gets. And the scoop, right or wrong, is that the major portion of this “retirement plan” is in unexercised Halliburton stock options.

    Earl

  87. Anonymous

    I think it it rather amusing that Mr. Paulson, an ex-CEO of a major Wall Street firm and an extremely wealthy person, is now personally presiding over the demise of unfettered capitalism. One of those happy moments in revolutions. As my wife said today: nearly twenty years ago the Berlin Wall fell, and now Mammon is falling.

  88. Anonymous

    Remember No taxation without representation? If our founding fathers could only see thier accomplishments wasted by a government more ravonous than the british monarcy they would call for revolution and demand the heads of these bastards from both parties. wake up america, the government changed laws to ease restrictions on predetory lending practices and no one raised much more than an eyebrow. with a pocket full of bank cards and a new plasma on the wall in a mc mansion you couldnt afford.What happened to having a down payment and a stable income before you look for a house? Yes, a small percentage were duped into adjustables but many were not. Now we must pay the price for frivolous spending and instead of taking the medicine and letting the market reset we are going to give the very bastards that caused this a get out of jail free card and a trillion + with no accountability. I feel regret that the ones to suffer most are those that put thier ideals into saving, and investing conservativly. they are watching thier moneys dissapear. shame on government. Its not if we are going to pay but how bad and can we recover in the next 10 years.

  89. Anonymous

    “The last act of a corrupt government is to loot the treasury.” — Shawn H

    We need a name for this Brave New System. I propose “Kleptofeudalism.”

    Under Kleptofeudalism, a kleptocratic, one-percenter elite owns all the wealth and runs the country. The remaining 99% of the pop consists of perpetually indebted Worker/Suckers, who function as the livestock herd of the Kleptocrats.

    Worker/Suckers are obliged to flip the burgers, swab out the toilets, send their offspring to go splat in obscure foreign wars, and — oh yes — breed more Worker/Suckers to secure and service the Treasury debt. The Kleptocrats will feed on them, like a spider sucking the green guts out of trapped fruit fly.

    Sustainability issue: even cranially-impaired Worker/Suckers will conclude that having more offspring under kleptofeudalistic wage-slavery is not an attractive proposition. Global population will decline. The debt cannot be secured. Obligatory cloning is one possible way out, if it can be ramped up to industrial scale.

    Or, the Worker/Suckers can rise up against their Kleptocrat overlords. Crucify them on a cross of gold! LOL!

  90. S

    Alan S. Blinder has proven himself a complete idiot. The guy is painful to listn to. Not as bad as listening to the arrogant fool bernanke but somewhere north of p p p p paul s s s sonnnn

  91. Anonymous

    September 21, 2008

    I can “see” that the queue of the “you know who’s”, at the unmarked back door in the alley behind the Treasury, has now extended to around the block, just like it did with the advent of the RTC back in the 80’s. Everything will happen fast since there are no laws or disclosures necessary. And hey, Paulson has to Jan. 21, 2009, or something like that, to get the hand off done. No problamo!

    Does anyone know how hard it is to get a push cart bar license in D.C.? Yes I’m always thinking of opportunity in my limited “Average American” way.

    Earl
    With a higher tide than ever scene approaching.

  92. Anonymous

    When has the govt ever done a project under budget?

    The cost will be 3-5 Trillion.

    This is an attempt to destabilize US society so Bush can declare military rule (ahhh Banana Republic?). The Bush administration is ‘blowing the dam’ so that the ensuing flood washes away and hides their transgressions.

  93. bg

    I do hate this. I wrote to my senators and congressman yesterday. I don’t know if we have doublethink or regulatory capture, but it is unfathonable that we are going to reinflate the monster that gave us this crisis. We could spend far less capitalizing a replacement banking system that is highly regulated (which is going to happen anyway) and pays smaller bonuses. Or we could get the money to the home owners and Warren Buffet could fund the new banking system in a heart beat.

    OMG it is a bad time to be a republican. The populist party has much tighter logic.

  94. Anonymous

    BG -there isn’t time for that. Its important to the regime that the Dow Jones decline happen on the Democratic watch assuming they get in.

    And notice the $2.5 billion bailout approved for Lehman employees, only New York employees -not Europe and Asia, infuriating them.

    Only loyalists need apply for the reorganization.

  95. Steve

    But wait…there’s more; the deal just isn’t sweet enough for the financial services lobbyists. The WSJ is reporting:

    “The Financial Services Roundtable is pushing for key refinements to the Treasury’s market rescue proposal. It’s calling for the Securities and Exchange Commission to suspend mark-to-market accounting rules for all mortgage related assets, even if temporarily. It wants to ensure the government bid for assets does not count broadly for accounting purposes, so that auditors cannot force banks to mark down their mortgage-related assets to the government-set price. It also wants home equity loans, construction loans and securities issued by Fannie Mae and Freddie Mac included in the deal.”

  96. William Mitchell

    We seek a solution with transparency and accountability, and less expense. How about this:

    Increase FDIC capital 10x, to $500b.

    Increase deposit insurance to $250k per depositor. Insure money market deposits and interbank loans for 12 months.

    FDIC judges ACTUAL capital ratios (not fakery reported on balance sheets), and seizes banks that don’t meet existing FDIC regs.

    FDIC seizes BIGGEST weak banks first (e.g. WaMu) and moves down, to maximize positive impact on public trust.

    FDIC corrals bad assets and auctions them off slowly over time. FDIC sells good assets and deposits to good banks.

    Investors in seized banks are treated as in a bankruptcy: equity is wiped out, debt is worked out based on remaining equity, if any.

    Executive management of seized banks, is fired, blackballed from other seized banks, and passed to FBI for investigation.

    This is very similar to the RTC, but with added deposit insurance.

  97. Moopheus

    I also wrote to my congressmen, and even included a link to this post, as it explains things far better than I could. Not that they’ll read it, of course. But they need to know that people are paying attention and don’t like what they see.

  98. Anonymous

    Giulio Tremonti, MY HERO. From the LA Times:

    “The finance minister of Italy’s conservative and pro-U.S. government warned of nothing less than a systemic breakdown. Giulio Tremonti excoriated the “voracious selfishness” of speculators and “stupid sluggishness” of regulators. And he singled out Alan Greenspan, the former chairman of the U.S. Federal Reserve, with startling scorn.

    “Greenspan was considered a master,” Tremonti declared. “Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most … It is clear that what is happening is a disease. It is not the failure of a bank, but the failure of a system.”

    In an interview Thursday in the Italian newspaper Corriere della Sera, Tremonti drew a comparison to corruption-ridden Albania in 1997, when a nationwide pyramid scheme cost hundreds of thousands of people their savings and ignited anarchic civil conflict. “The system is collapsing, exactly like the Albanian pyramids collapsed,” Tremonti said.

    http://www.latimes.com/business/la-fi-euromood20-2008sep20,0,7535469.story

    ————

    Oh, hallelujah, somebody else gets it! Greenspan was the Pied Piper of Albanian pyramids. And the looted, Third World economy he left behind is an international laughing stock … as it richly deserves to be.

  99. Abbott_Of_Iona

    "Sec. 12. Definitions.

    For purposes of this section, the following definitions shall apply:

    (1) Mortgage-Related Assets.–The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008."

    Matbe I'm going blind, but i don't see that this definition restricts The Secretary to real estate (residential & commercial) on the soil of the USA.

    Is it possible that an Investment Bank has a mortgage on properties in London, Paris, Berlin, Tokyo?

    If these have been sliced and diced, are htey included?

    Yours in ignorance

  100. Abbott_Of_Iona

    Re my previous comment.

    Is this just about property on the soil of the USA.

    It seems tnat as long as the “Institution” was “Headquartered” in the USA (as defined) it dosen’t matter where the actual real estate is.

    I think this is a bit disturbing.

    Does anybody else?

    Sec. 2. Purchases of Mortgage-Related Assets.

    (a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

  101. Marat

    There are too many ironies in our current situation to bother with any one or two. And there are too many reasonable things that our government might do to help order the markets while they make the necessary corrections to inflated assets without enriching the corrupt financial classes. But it is likely that these will not be tried. If we are not willing to be beggers to our own elected officials to enforce our own laws it seems we are left only the power of 18th century French peasants. In the end we will have to remember that we are free women and men and act like it.

  102. fimbo

    Talk about moral hazard!

    If this plan is passed through Congress, I think every homeowner whose mortgage is even a dollar underwater will stop paying it, essentially daring the government to foreclose on them.

    If they are allowed to get away with it, the practice would spread far and wide and put the entire credit system in danger

  103. Francois

    “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.”

    “It would be best if this provision were expunged, but failing that…”

    Yves,
    This provision is motive enough to scuttle the entire plan in its present form. There can be NO compromise whatsoever on that point. Congress HAS TO refuse, pure and simple.

    If Congress surrenders the power of the purse, they are dead as an institution.

    Period.

  104. Abbott_Of_Iona

    Stop me if this gets boring.

    But.

    A “Vulture Fund” could set up a “Headquarters” in Delaware,

    buy RMBS or CRE back securities,

    which are not on the soil of the USA,

    and Hank could give them any amount of money he wants,

    AND

    no court in the USA, up to and including the Supreme Court

    Has the authority to stop this (Section 8)

  105. Abbott_Of_Iona

    fimbo said…

    “Talk about moral hazard!”

    Moral hazard is much easier than that.

    Just go to your Doctor, have the Doctor say that your child is ill and that it will cost $10,000 to treat your child.

    Which is more important?

    Your child or your mortgage?

    Your child obviously.

    Therefore the State takes on your mortgage, and you can live rent free for two years.

    Then, your child is miraculously cured, just like the USA insolvency.

    Everybody wins.

  106. Abbott_Of_Iona

    Sorry to be a bore

    But

    Per my previous post

    “Executive Order 12631–Working Group on Financial Markets – Mar. 18, 1988 – Established by President Regan”

    AND NOW THIS form Secretary Paulson

    “In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–

    (1) providing stability or preventing disruption to the financial markets or banking system”

    The Secretary has already provided ample proof to Congress as a member of the,

    “Working Group on Financial Markets”

    that he is NOT COMPETENT under Section 3(1).

    He has had that responsibility for the last TWO YEARS,

    AND HE HAS FAILED.

    Should Congress approve this bill they will be guilty of a failure of even the most basic level of oversight.

    If Congress approve this bill it seems obvious that the Secretary must first be fired.

    But, maybe I’m wrong.

    Maybe some President after President Regan rescinded Executive Order 12631.

  107. Anonymous

    Maybe Paulson is the modern counterpart of Sir Francis Drake of Golden Hind fame. Perhaps Paulson, like Drake, wants a pirate ship and suspension of prosecution in order to conduct raids and collect booty. It worked out well for the Queen, England and Drake.

    If Paulson succeeded in such a mission would many Americans, except the raided, really care how he did it? Success would make him the greatest US hero since George Washington…and, Shrub’s legacy would be patched up.

    This is only wishfull thinking on my part. But, there is the old saying…’Give the dog a good name and he will be a good dog.’

    River

  108. Anonymous

    Question: If the federal government can solve the problem by ignoring present market value and relying on the future price of the assets as the fair value, then why couldn’t the private sector solve the problem by being allowed to drop mark-to-market accounting requirements?

    Or would answering such questions raise uncomfortable questions about the government’s governance and interfere with its blatant power grab?

  109. Dave Raithel

    I’d have thought a lawyer or two would have weighed in on the “review” question, but I don’t find anything on that in the comments; so I’ll chime in with the qualification that I am only a (proud) law school drop out. It is true, as one commentator observed above, that courts can be restricted from reviewing matters of discretion assigned to agencies. That does not extend to matters not within discretion – criminal conduct. So stupid decisions are not reviewable – the courts can do nothing about them – but a criminal act would be, e.g., somebody got a better deal by passing a kickback. In the case where lower courts have been denied jurisdiction by legislation, then the Supreme Court itself has jurisdiction. Per Article III, Section 2: “The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States…. to all Cases affecting Ambassadors, other public Ministers and Consuls … [and] to Controversies to which the United States shall be a Party…In all Cases affecting Ambassadors, other public Ministers and Consuls… the supreme Court shall have original Jurisdiction.” All this may, however, be scholatistic and irrelevant. If the political makeup of the Court itself is disposed to permit petty theft (what’s a few million here and there when hundreds of billions go by?)any allegations of fraud, etc., would be thwarted by a denial of standing. It isn’t that, theoretically, an avenue for review in no case exists; its that the viability of the background assumption of this being a government of laws, not of men, is questionable.

  110. Terry

    The bank bailout legislation proposed by the Administration is an outrageous abuse of the US taxpayer that tramples on the Constitution and free markets, and will, in the end, not substantially change our weak economic condition while bailing out the fools who caused the crisis.

    Moreover, while offering the Secretary of the Treasury unlimited authority and $700 billion to bail out his friends on Wall Street, the only thing the other 300 million Americans will get is a larger national debt and a bigger tax bill.

    If there is going to be an effort to stabilize financial markets involving large sums of taxpayer money, it needs some balance. For example:

    –The boards of directors and executive committees (and maybe others) at the banks receiving US taxpayer money are automatically fired, forced to return their ill-gotten bonuses for the last 3 or more years, and banned from any executive or board position in a publicly-traded US company for 5 years. (Its the Millken solution.)

    –Ban the creation, sale, purchase, or brokering of any asset-backed credit derivative by any bank operating in the United States. Similarly, ban the placement of any asset-backed security in foreign credit derivatives.

    –Every American taxpayer receives a stimulus check of approximately $6,300 to offset the cost he/she will absorb for this $700 billion bailout. (It makes as much sense as spending the money on banks that knowingly took excessive risks for big profits.)

    –The $700 billion may only be used to acquire the mortgage-based assets of US banks (only) that are insolvent, not just illiquid. This was the way the RTC handled assets. Otherwise, the bailout only rewards the outrageous behavior of the banking sector and its shareholders–not all Americans. (So, it could buy LEH assets, but not GS or MER assets.)

    –Require that the money be used to acquire a just less than 80% equity in the bank (a la AIG) to ensure effective USG control over banking practices. Also cut out preferred shareholders all together and establish a 30-70% haircut on the bank’s outstanding bonds–consistent with the toxicity of its asset holdings.

    –Finally, absolutely and completely eliminate any language (such as is the current draft) that puts the Secretary of the Treasury above the law (“non-reviewable”). In fact, put stringent language in that states he must obey all US laws.

    The draft legislation is an outrageous effort by the Administration to bail out its buddies. It defies the Constitution, destroys free markets, insults the role of Congress in overseeing national policies and laws, and irrepairably damages all American taxpayers for the benefit of a few.

    IT CAN NOT BE PASSED! WRITE YOUR CONGRESSMAN/CONGRESSWOMEN RIGHT NOW AND TELL HIM OR HER IN CLEAR, SIMPLE, POLITE, AND EVEN CONSTRUCTIVE TERMS WHAT YOU THINK OF THE PROPOSED BAILOUT

  111. Abbott_Of_Iona

    Murph said…

    September 21, 2008 7:13 AM

    “The limitation on liability simply restates the existing, long-standing practice for Agency actions. Courts do not overturn Agency actions or second-guess Agency decisions. Courts limit their review to whether an Agency followed its own, states rules and guidelines.

    Agree with the plan or not, the clause that is making everyone crazy is an unremarkable restatement of current judicial practice with regard to government agencies.”

    Richard Kline said…

    “So Murphy of 7:13, what you say is materially inaccurate even on the basis of your own terse summation. In the case of Paulson’s proposal there are, purposelly, neither Agency nor guidelines, and hence nothing whatsoever for a court to review. There is no oversight provision; quite the reverse, the proposal specifically solicts the authority for the Secretary of the Treasury to act as he sees fit, i.e. blanket immunity. The sums of money involved are distinctly _atypical_ for ‘standard Agency practice,’ to say the least. Applying the reasoning commensurate for standard practices to an extremely irregular proposal indicates a lack of engagement with the substance of the proposal.”

    Mr Kline,

    I would be less kind that you about the ignorance of “Murph”.

    If Section 8 applied to “Murphs” assets his/her language might be considerably stronger.

    The extent of Section 8 in the context of this bill,

    “Sec. 8. Review.

    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.”

    is not extending to a State Agency it ability to do “Business” without “Day to Day” interference from politicians.

    It provides for

    “Decisions by the Secretary”

    NOT DECISIONS BY THE AGENCY

    The drafting of this bill gives the Secretary a blank cheque from prosecution, even for honest mistake.

    I would of course not question the ability of the Secretary to make an “honest mistake”.

  112. Anonymous

    The players with the most toxic assets in the highest quantities will be rewarded the most. This is so bad it doesn’t even classify as moral hazard… this is immoral certainty.

  113. Rosabarba

    “You overpaid little rascals pushed the world to the brink of financial apocalypse. Here’s $1 trillion, please promise not to do it again. No, you don’t have to say you’re sorry.”

  114. Anonymous

    This proposal, as comented in the above, is a pure and simple fucking joke.

    If this is the very best that Paulson and Bernarke can come up with, then this market is truly fucked-bigtime.

    I’m selling my IRA stocks and moving to cash and 2yr notes until this kleptocracy called the Bush administration goes bye bye.

    Sad day for America my fellow citizens, the bell tolled and we had no one to answer. Stunning, simply stunning this idiocy.

    CB

  115. S

    dont put it passed geither and the paulson cabal to press futures down to spur action. Dow futures down 175 presently. Perfectly said CB. US is an international joke. our moment has arrived.

  116. Dave Raithel

    From the embeded email from the staffer, above: “He [Paulson] explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won’t sell at market prices.” There’s an example of what would be a stupid, non-reviewable, even if “honest” mistake (as another commentator poses, tongue-in-cheek.) Yet still another commentator asked a question I’ve also often put: Just how does one value a paper for which there is no market?

    In the past when I’ve asked that, I’ve asked why the underlying assets cannot be used to come up with some value for the paper (the value of which depends upon the flow of funds from the assets.) I got two different kinds of answers: 1) The composition of the papers are so complicated that a paper trail back to the originating flow of funds cannot be found. (I really still don’t believe this, nobody does nothing without a paper trail, even if digital, when money is involved – only the pettiest criminals don’t keep records.) 2)The value of the underlying assets themselves are in flux, because the value of housing is dropping. THAT explanation I can accept. So then, if there is no market for the paper, and the value of the underlying assets are in flux, how’s Paulson going to determine what market prices are?

    If, as others here observe, this is a done deal but for the details, we can only hope and demand that Paulson and Company play chicken with those holding paper they cannot otherwise move. If, as many people here and elsewhere have claimed, housing values have to fall 30% to 50% before anything called “equlibrium” can be established, then grossly assume that’s all the paper is, at most, worth – half to 2/3rds.

    Believe me, I have no desire to prop up thieves on Wall Street. But I have no delusions that economic collapse is going to promote a new wave of liberal enlightenment and progression to establish a more just society. Things will just get uglier and uglier….

  117. Abbott_Of_Ions

    The Grand Old Secretary of the Treasury

    Who has made clear his incompetence by virtue of his Membership of the “Working Group on Financial Markets”

    “The Grand Old Duke of York

    He had ten thousand men.
    He marched them up to the top of the hill
    And he marched them down again.

    And when they were up, they were up;
    And when they were down, they were down.
    But when they were only halfway up,
    They were neither up nor down!”

    Is anybody concerned that the
    The Grand Old Secretary of the Treasury has left the USA only have way up but neither up nor down.

    The downright incompetence of this man is only comparable to the incometence on the Bank he formerly Chaired.

    Of course the The Grand Old Secretary of the Treasury dosen’t care. When he became the Secterary he cashed in $500,000,000 tax free. That made the taxpayer comfortable that there would be no conflict of interest.

  118. Matthew Dubuque

    Matthew Dubuque

    Here is a video of Naomi Klein, author of THE SHOCK DOCTRINE: THE RISE OF DISASTER CAPITALISM, debates the 700 billion dollar bailout with a Ron Paul supporter:

    http://tinyurl.com/3v3rf2

    Ms. Klein and the Ron Paul supporter both oppose the bailout.

    Matthew Dubuque

  119. Abbott_Of_Iona

    Fell free to tell me that I am a bore. But I’m going to repeat this.

    “Executive Order 12631–Working Group on Financial Markets – Mar. 18, 1988 – Established by President Regan

    Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:
    (1) the Secretary of the Treasury, or his designee;
    (2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee;
    (3) the Chairman of the Securities and Exchange Commission, or his designee; and
    (4) the Chairman of the Commodity Futures Trading Commission, or her designee.
    (b) The Secretary of the Treasury, or his designee, shall be the Chairman of the Working Group.

    “By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

    Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and maintaining investor confidence””

    Hank Paulson ahs been a member of the “Working Group on Financial Markets” for two years.

    The objective of the “Working Group on Financial Markets” ~ established in 1988 was to

    “Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and maintaining investor confidence””

    Hank Paulson “The Grand Old Secretary of the Treasury” has now presented a bill to Congress which states as its PRIMARY objective:

    “In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–

    (1) providing stability or preventing disruption to the financial markets or banking system”

    So the Grad Old Duke of the Treasury, having already had the responsibility as a member of “Working Group on Financial Markets” for TWO YEARS

    Now (having failed to do precisely that) now wants Congress not only to give him what he already has the authority to do (and failed to do) but to provide $1.5T + to do it.

    Is this what they call Chutzpah?

    THIS MAN IS A PROVEN INCOMPETANT

    The question is the competence of Congress

  120. Richard Kline

    So LJR,

    If you only knew how true your comments were . . . : ) In better times, we’ll chew the fat on this one. But I can come down from the mountain and sling the patois as needed, if only for protective coloration.

    I have a draft of the letter I’ll be sending on to Congressfactors diverse. First by email since time is of the essence, then on paper. It would get buried in comments here, but I’ll paste it in when Yves has the opportunity to post again.

    How does one value assets for which there is no market? HANK: “How much yah want fer dat?” BANKSTER: “$X billion.” HANK: “Well, _I’m_ da market, so here’s $X billion + 15% fer yer honesty.” Seriously, there is _nothing_ to prevent Paulson from doing exactly that, and no kickback need ever change hands. He can pay whatever he feels like. The only thing ‘fair’ in the pricing of this will be the wind in the Bahamas when its over.

  121. Anonymous

    Financial Post headline: “Congress hopes to pass $700 billion bailout Monday”

    Folks, that means without debate!

    If you’re going to fight this, it has to be in the U.S. Senate by filibuster. Try to find an honest junior Senator (good luck!) and focus all your efforts on him or her. A single Senator can buy enough time by refusing to yield the floor.

  122. Anonymous

    Not chance, bub. Wrong century. I’ll bet $1000 to a donut this passes on a voice vote with Cheney presiding in the Senate. Game over.

  123. Abbott_Of_Iona

    Anonymous said…

    "Financial Post headline: "Congress hopes to pass $700 billion bailout Monday"

    Try to find an honest junior Senator"

    I say find any Senator with a pulse.

    The Secretary of The Treasury is INCOMPETANT by virtue of Executive Order 12631.

    His competance must be investigated by Congress before they ascent to this bill.

    Otherwise the Supreme Court can at a future date determine the competance of the Secretary and the fact that Congress did not consider competance a factor.

    Any contract made by the incumbant incompetant will be delclared null & void.

  124. lou_srewlect

    Was it Adam Smith who described how governments could pay off debt by lowering interest rates? How about government paying off debt by raising inflation? Isn’t dumping 700B on the economy a healthy boost to the inflation of the money supply? So, doesn’t this diminish the actual value of existing government debt? (especially bad debt, where there was no value there to begin with) I’d like to see the calcs on that, but I’ve got to go to work tomorrow and watch the value of my wage get annihilated.

    uscapitalistparty@blogspot.com

  125. Anonymous

    Thanks for a good overview of this bailout.

    Question: Since this bailout may cost as much as 1-2 trillion dollars, why can’t this just be redirected to permanent tax rate reductions – say by 20-25 percent? As Max Wolff says, credit is substitute for income.

    WHy bother trying to bailout the credit markets, when average joes can’t take on more debt?

    Plus, reducing taxes is absolutely transparent, and no one gets to be the economic dictator.

  126. me

    So the Reagan plan was to make the government so weak that it could be drowned.

    And the GWB plan was to make the government so burdened by committed costs that it couldn’t take on any more responsibilities.

    And the current plan is to have the government eat all the crap and swell up and die?

    This is progress.

    Beam me up, Scotty. No intelligent life found.

  127. S

    UNREAL JUST UNREAL.

    U.S. Treasury Widens Scope of Bad-Debt Plan Beyond Mortgages

    By Dawn Kopecki

    Sept. 21 (Bloomberg) — The Bush administration widened the scope of its $700 billion plan to avert a financial meltdown by including assets other than mortgage-related securities.

    The U.S. Treasury submitted revised guidance to Congress on its plan, referring to its proposal to purchase so-called troubled assets, a change from its original plan for investments tied to home loans, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

    The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset.

    Firms that are headquartered outside the U.S. will now be eligible, in another change from the guidance sent to Congress yesterday, according to the document. The size of the plan remains unchanged.

    Bloomberg

  128. Steve

    Buiter supports the plan but in combination with forced debt-equity swaps sufficient to bring leverage ratios to some safer level. Buiter doesn’t mention it, but it was only in 2004 that SEC raised the leverage limit from 12-1 up to 30-1.

  129. Moopheus

    “Time for a tax revolt.”

    It’s more than just taxes. If this passes, we’ll have to keep our money out of the financial system as much as possible. Withdraw cash from the banks, the funds, the markets, as much as you can stand to hold. Don’t use credit or debit cards. If Washington won’t punish them, then we have to. And the only way we have to do that is drain the system. Sure, it’ll crash the credit system, and it’s not entirely rational, and there’s not even enough currency to cover it all, which will make it real fun.

  130. lrm21

    Responses to several comments

    A) The no review, and no liability in the Paulson plan this is very necessary for several reasons

    1. No institution will enter into this deal if they think the next administration is going to change the terms or even go after them. They would rather choose Chapter 11, 7. This bailout is voluntary and it has to be more attractive then bankruptcy.

    Rember the bailout only works if we prop up the prices of assets.

    Paulson cannot make decesions and be second guessed or thrown to the wolves. For this I dont fault him, he has the worst job in the world picking up the pieces of our excess where we are all guilty. No one put a gun to our heads and forced us to use our houses as a piggy bank. Why should Paulson face any liabilities for trying to fix this problem, if not he should just walk and let the next administration deal with this.

    B) Central Bank idea. This is being bandied about and it appears to be getting some steam. We all need to study up on Austrian economics. This school of thought has been ringing the warning bell for this cris for some time. This event is a faliure of central planning. Our economic system is underpinned by a Fiat Currency whose value is determined by Central bankers and the executive branch. Our tendency to inflate currency for every blip in the stock market let us to believe that the good times will always roll

    The idead that further consolidating the financial system in the hands of benevolent technocrats is ridciculous.

    How can people conversley cry that the government is incomptent and then say we need further regulation more oversight more government control.

    We had a central Lender for housing Fannie Mae and Freddie Mac and they became poliitical tools. We have a defecto central bank in the Fed that even though it is a private insitution has all the trapping of a political institution.

    Centrally planned economies allways end worse. For all our failures we are still better off then any of the remenats of the Soviet Union. How bout Cuba, North Korea, even beautiful China for all its progress is a giant cess pool.

    What we need is to go back to a smaller government, more personal responsibilty and a more fiscally prudent mindset. Hopefully the markets and people have gorged on credit for some time to come.

    As one talking head says, the new status symbol will be the paid off house.

  131. JO

    Hi all, the government plan will effectively buy garbage debt at purposely inflated prices.
    Two comments today. Talk about a vision which was right on the money:
    1) I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominent men.
    Woodrow Wilson, after signing the Fed Reserve Act in 1913

    2) If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that grow up around them will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.
    Thomas Jefferson

    All American taxpayers must voice their opinion to Congress and band together to stop this monumental fraud being perpetrated by these animals.
    JO

  132. Anonymous

    Allowing the treasury to be pillaged without oversight or accountability to CURE this financial crisis is tantamount to trying to put out a fire by throwing on gasoline. “This is going to help, trust me, pay no attention to the damage I’m doing!”. An infinite line of credit with $700B able to be drawn from taxpayers at a time, beyond any law or control? Pure madness.

    What we have here is a declaration of war on the United States, nothing less. Worse than any crisis in _hundreds_ of years.

    Unlike the cold war when nuclear Armageddon was a chance rather than a certainty, I believe the impending death of the US is a certainty. The question is what can we do before this happens to try and survive the aftermath?

  133. spragus

    How is it that someone (senior) from Goldman can pump out so many lame brained schemes? The SIV replacement plan was one thing, but this week’s mtge buyout scheme takes the cake. Doesn’t Treasury have any thresh hold for embarassment?

  134. Anonymous

    “No one put a gun to our heads and forced us to use our houses as a piggy bank.”

    True enough, but it was the Fed that stuck the huge carrot (In the form of 1 PERCENT interest rates) in front of the nation and we bit into it. It caused a massive misallocation of capital. The housing bubble would have never gotten off the ground with 8-10% interest rates. Those kind of rates would actually induce savings, not asset bubbles.

    The Greenspan Fed caused the housing bubble and the guy just isn’t getting the disrespect he desperately deserves.

  135. Anonymous

    Huh. Funny thought just now. I always hated Greespan because he betrayed Ayn Rand and joined the looters, keeping them in power. Now I wonder if he was a sleeper, quietly setting up the Fed for a disaster that would blow up the entire fiat financial system. Very funny question.

  136. GT

    Anonymous said…

    "Should the USA’s debt rating be AAA?"

    Of COURSE NOT. Are you out of your MIND?

    The only reason that the US retains AAAis because Moody's and S&P are gutless wonders who won't downgrade an issue until its issuer has prepared its Ch11 filing.

    We all know now though, that rather than being due to the lunacy of having politically appointeed hacks setting the short term price of money, the problems tems from one source: repeat after me… "It's all the short-sellers' fault".

    The natural corollary of that whackery is that anybody who sells anything that they don't currently have in their inventory should be prevented from doing so.

    I guess it would prevent channel-stuffing by tech firms… and it would stop those pesky submarine0makers from driving down the price of submarines by selling a submarine before they were sitting next to the dock.

  137. Blissex

    «Since this bailout may cost as much as 1-2 trillion dollars, why can’t this just be redirected to permanent tax rate reductions – say by 20-25 percent?»

    But I have an even better proposal: do both. As well have been told, a $1-2T trillion tax cut will generate more than $1-2T of extra revenues thanks to the Laffer curve, so that tax cut will also pay for bailing out the financial sector.

    Isn’t that absolutely what Bush should do if he believes in himself and is consistent with his party’s policy?

    :-)

  138. Anonymous

    NOW HEAR THIS!!!!! Like YOU Glacierpeaks….

    America HAS NOT HAD laissez-faire free market capitalism since Big Biz bought the ICC for itself in the late 1800's. The progressives were merely a unconstitutional blend of socialists & fascists, learned straight from the militarizing and rising Euro-dictators.

    Abolish the Fed, ergo the interest expense & IRS. Stiff the Fed for it's debts (it's been bleeding us w/interest and inflation long enough)

    Throw all the traitors to the constitution in JAIL, or better yet, hang em.

    Wilson & FDR should always be at the bottom of any presidents lists, smack down there with the Clintons and Bushs.

    And the establishment needs to quit glorifying those bastards Hamilton & Lincoln as well. Power mongering mercantilists both. They built empire's foundations with precedent.

  139. CharlieHipHop

    We’re bankrupt. We’re going to have to nationalize a good portion of our financial infrastructure, at least temporarily.

  140. Anonymous

    I suspect “default” is the actual goal here, as it would set the stage for a dose of disaster capitalism and finally eliminate those last vestiges of the New Deal and the Great Society: Social Security and Medicare.

  141. me

    > I suspect "default" is the actual
    > goal here, as it would set the
    > stage for a dose of disaster
    > capitalism and finally eliminate
    > those last vestiges of the New Deal
    > and the Great Society: Social
    > Security and Medicare.

    Yep. Drown the government in debt.

    And the Word Verification, I kid you not, is:

    aaack

  142. Anonymous

    I fully agree with many of the above comments. This is nothing but the Robbery of the Millenium. There should be some shame and fear of God in these IV League Graduates… There was nobody to bailout the thousands of home owners whose homes were being foreclosed–but the entire Senate is there to protect these irresponsible and greedy financial companies..

    Also the fun thing is They say that the common man will make money out of this bailout. How? Buy those bad assets and wait for the house prices to skyrocket and then make profit on these bad assets. Well we can’t afford houses in today’s stressed market.. Do you think people are going to wait for the house prices to skyrocket and make them more unaffordable.

  143. Peggy McGilligan

    The bailout is the swan song of Wall Street fat cats, who seek to retire from the predatory capitalism of the past decade. When Bill Clinton eased banking restrictions in California, he dished out $8-billion dollars for “community reinvestment loans.” Was the money ever repaid: no, it just evaporated. Undoing regulations sets a precedent, as does “comping” real estate. With the influx of cheap capital, properties already overvalued at $125,000 soar to $525,000. This buys a modest home. When the “creative financing” schemes fell through, as is their wont whenever 30-million Mexican nationals buy inflated properties and default, it left banks around the world in the lurch (see global economy). Never mind that the aforementioned demographic is the new face of the Democratic Party; their mortgages morphed into “toxic” financial instruments, which Congress itself cannot quantify. It’s a $90-billion bailout at best. Hillary Clinton knew who’d get the loan giveaways; she bought votes. So, why should hardworking Americans perpetuate the housing bubble? Why write the bubble boys a blank check? Why pony up a trillion-dollars, as a cost of doing business? Because it’s a scam! And, this is the exit strategy. Where’s that $8-bilion dollars? The bubble is the problem; let it burst. Let those 18-million cracks pass the hat: http://theseedsof9-11.com

  144. Peggy McGilligan

    Did you know many of the fat cats who circulate from board to board and from job to job throughout the financial industry are also members of the Bilderberg Group and or the Trilateral Commission, founded respectively in 1954, and in 1973, in New York City? When someone takes your money and steals your car, it makes an impression. When they belong to such a secret political clique, it leaves an indelible impression. Many elected officials even belong to these cabals, hence the secrecy. When Bill Clinton eased banking restrictions, he dished out $8-billion dollars for community reinvestment loans. When the financing schemes fell through, as is their wont whenever 30-million Mexican nationals buy inflated properties and default, it left banks in the lurch. Hillary Clinton counted on the loan giveaways to buy votes. Interestingly enough, had Hillary secured the nomination; she, instead of Barack Obama would preside over the bailout. So, where’s that $8-bilion plus dollars? Where’s Hillary? Why the caveat in Section 8 of the bailout: “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.” The Global Initiative people (code speak for car thieves) took my money; they stole my car. If you or I did half the things these people have done, we’d be serving consecutive life sentences. Wise up, get angry, and let the bubble burst. Besides, Ben Stein says we’re going to be just fine. You have my word on it too. Gentlemen, I want my money back: http://theseedsof9-11.com

  145. Bob, Colorado

    The senate voted FOR the travesty. No time for reason. Someone will have a LOT of MONEY now to skim from. I have not heard ANY answers to convince ME to be for this BAILOUT. This is all absolutely APPALLING!

  146. fav.or.it

    Economic Fascism and The United States

    Illegal Use of Equity – Average and Normal
    If I do not believe in, trust, or support the US Federal Government, my home should not be in jeopardy. The Federal Government, whenever they choose, through the IRS, will take your home if you do not support them. This confiscation of property by the Federal Government is absolutely and unequivocally wrong, and it is illegal.
    For the Federal Government to threaten me with stealing my home because I want them to fail, is economic FASCISM.
    Let the Federal Government collect it’s taxes but to put my home in peril because of taxes – is ECONOMIC FASCISM.
    I want the Federal Government to spend itself into bankruptcy and irrelevance; and it is my patriotic right as a human and and an American to have control over my money to do so.
    I believe in local taxes, and local representation of those taxes; to me – the FED is DEAD.
    The day a Trident Nuclear submarine pulls into port for salvage and dismantling, because the US Federal Government has no money, will be the day I open a bottle of champagne, and christen my life.

    (I will drink it and not smash it on some battleship).
    If you would like more information on this please check out this article:
    Illegal Use of Equity – Average and Normal
    http://www.indymedia.org.uk/en/2008/10/410488.html
    http://perth.indymedia.org/?action=newswire&parentview=133033

    sent from: fav.or.it

  147. Olga

    We are missing the point. Our pro-or-against bailout opinions still do not exempt us from the unpleasant responsibility we are trying to avoid – looking deeper into the reasons of the crisis, which means looking deeper into ourselves and out attitudes. The crisis is caused by our overgrown egoism pushing us to chase personal pleasures without considering other people and consequences such pursuit could bring about.
    If we don’t do it voluntarily, we’ll be forced to stop and analyze our behaviors by the crisis unfolding even further.
    More on the financial crisis, its reasons and the ways to resolve it is here – http://www.laitman.com/2008/10/the-remedy-for-the-global-crisis/

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