Links 9/20/08 Posted on September 20, 2008 by Yves Smith ‘Tent cities’ of homeless on the rise across the US Telegraph Hank Paulson’s legacy will be very dull financial institutions Damian Reece Telegraph Some Observations on the Ongoing Crisis: Causes and Opportunity Cost Again Menzie Chinn, Econbrowser Antidote du jour: Post navigation ← New Bailout Proposal Costs Estimated at $500 Billion to $1 Trillion Key Lehman Employees to Get $2.5 Billion in Bonuses → Subscribe to Post Comments 17 comments fatbear (from home) September 20, 2008 at 8:37 am Yves – already up to $700B – and they haven’t even started negotiating…. Anonymous September 20, 2008 at 11:53 am When they tell you we are trying to avoid a world wide melt down what they are saying is that the world economy net worth is zero or insolvent. There are no banks because they are worth zero. Any investments are worth zero. Any dollars you hold are worth zero. Why? Simply put, greed. They sold more paper than can be covered. Sold so much paper that the debt involved is more than the world economies net worth, for years to come. Commodities are sold forward as necessities and will be the only values to compare against as national treasures since paper money will not be in vogue. Maybe defenses can be monetized if you can value destruction, only useful if you plan to deploy them. Anonymous September 20, 2008 at 12:15 pm I know you’ve been working tirelessly, but the draft bailout has been leaked. I’m not sure what they expected the reaction to be. The draft seems to be what I feared the most…a blank check. Who knows what Congress will do, but a blank check to Treasury in the twilight of a lame duck administration is, I hate to use the words, the height of stupidity. Anonymous September 20, 2008 at 12:19 pm Sorry, one more thing…looks like the arrogant Ambac cheerleaders (who have been gloating for a few months now) are going to have to crawl back into their cave. Anonymous September 20, 2008 at 1:36 pm This legislation is despicable. We all need to write letters or send faxes to our representatives in Congress telling them to vote against it, or we’ll vote against them, no matter what. If you write your representatives, you need to include your name and address, so they know that you are one of their constituents. Email isn’t as good, but if you send email, you need to provide your name and address. Senators and Congress people don’t care if they get anonymous emails, letters, or faxes. It would be wonderful if someone sets up a website, so we can take collective action to oppose this legislation, and anyone in Congress that supports it. They are going to destroy our money with inflation, and destroy our future income with taxes. Anonymous September 20, 2008 at 2:04 pm I believe the mechanisms are already in place for bailouts. Just need to raise the budget(debt) ceiling with a Congressional vote before recess, no debates, no problems. Anonymous September 20, 2008 at 3:17 pm I have done so and will next all contact all members of congress too. I am making every attempt to bring this matter to everyone i know .They ( Bush , Paulaon and Co) are tying to push this through ASAP fast with so that John Q public does not have time to analyze what is about to happen to him . “This legislation is despicable. We all need to write letters or send faxes to our representatives in Congress telling them to vote against it, or we’ll vote against them, no matter what.” Anonymous September 20, 2008 at 4:09 pm OK Anon 3:04; I’m John Q public – what is going to happen to me? Anonymous September 20, 2008 at 4:32 pm “I’m John Q public – what is going to happen to me?” You’re the bird in the photo. You get to pick Paulson’s nose. Anonymous September 20, 2008 at 4:51 pm “OK Anon 3:04; I’m John Q public – what is going to happen to me?” Bush/Paulson/Bernanke/Cox just proposed legislation that would let them buy an unlimited amount of junk debt at any price they choose, so they’d buy from rich investors at FAR above fair market value, so they’d be handing free money to these rich investors by paying say $3 for debt worth $2. They’d be able to resell the debt at any price they choose, so they’d sell to rich investors at FAR below fair market value, so they’d be handing free money to these rich investors by selling them debt worth $2 for $1. They’d also bar any court from reviewing their decisions. They legislation would let them hold up to $700B of debt, but that is no cap, because if they resell they can buy more as long as they stay under the cap. This is a license to defraud the taxpayer. It is worse than the no-bid contracts the Bush administration was giving to contractors in Iraq. If Bush spends $1-2 trillion handing out free money to rich investors, you and your children will pay for it in taxes or inflation or both. Anonymous September 20, 2008 at 4:52 pm Does anyone know if there is a rich populist that is as active in politics as the liberal Mr. George Soros? If there is, we should write that person a letter encouraging them to oppose this legislation. Swedish Trader September 20, 2008 at 6:41 pm Hi Yves, I got the feeling that were interested in knowing more about what happened during the Swedish Bank crisis. I have now read in a number of articles that the handling of this crisis is somehow a great example of a fair and successful resolution. I was active as a derivative trader in Sweden during this period and would like present how it looked to me. 1. The background was quite similar to the present crisis in the US. The households had stopped saving, credit of all kinds had exploded, real estate and stocks had been in a long bull market. The main difference was that Sweden at the time (1992) was operating a fixed exchange rate.2. I remember reading an article in an international magazine in 1991 that stated that the Swedish banks were the best run and most profitable in the world.3. When the Germans hiked their interest rates as a result of the economic boom that followed the reunification, most of the other currencies that were pegged to the DM got in to trouble. I am sure that many remember the attack on the pound that happened during this period.4. The Swedish Krona (SEK) also got under pressure and the central bank (Riksbanken, RB) hiked rates to defend it.5. During the boom years the banks had given out massive loans to real estate speculators. First to buy properties in Sweden and then in other countries as well. I believe that Swedish speculators at the time owned about 7% of all commercial real estate in Brussels. 6. Many of the loans had been given in other currencies, mainly DM. The reason was that the rates were lower and since the FX rate was fixed the risk was perceived to be insignificant.7. Now that the SEK came under attack and the RB took rates higher and higher ( at the peak rates were 500%, yes five hundred) the real economy and property prices went in to free fall.8. It became clear that the banks were not going to make it. If rates stayed up, there was no way that they would get their SEK loans repaid. If the SEK was allowed to fall, there was no way that that they would get their DM loans repaid. This was 100% clear at the time.9. One bank (Nordbanken, with a history as a state bank) was allowed to fail.10. ALL the other banks were given a 100% state guarantee for ALL outstanding liabilities. They paid NOTHING for this and the state got ZERO equity.11. In the end the SEK was allowed to fall. And it fell MASSIVELY, from 3 to 5 against the DM. It is very possible that the banks were tipped of beforehand by the RB and were allowed to bet heavily on this outcome.12. For the man on the street, this meant that: He lost A LOT of the value of his savings and income as a result of the devaluation; he got to pay MASSIVE spreads on all his bank loans for many years after. In summary, he went from an upper class European to a lower middle class.13. The Banks did fine. After a few years their stocks were back making new highs. I hope that this is of interest to you and again I thank you for a fantasic blog. Entropy Pawsed September 20, 2008 at 7:08 pm We now know the Reagan revolution was built upon smoke, mirrors, and free market ideology. All this brought to you by the Republican Party, the Party that wrecked America:) Just one last cheap fix before they leave. Swedish Trader September 20, 2008 at 7:16 pm To entropy pawsed, I don’t know if it makes you feel any better, but the prosperity in Sweden that preceded the crisis I describe above was built upon smoke, mirrors and Social Democratic Ideology……. Chris September 20, 2008 at 8:33 pm I thought “mortgage and mortgage-related securities” was interesting, and also “US headquartered companies”. Their is for sure an invite here for overseas funds to be brought back to take advantage of this once in a century offer. That would be good for the dollar wouldn’t it, but not so good for the countries not expecting dollar capital flight. Opposing the package is one thing. Anyone got ideas for what should be in an alternative? It is not comprehensible why the tax payer should have to pay anything for the crap these characters created. Taking it off their hands would surely be payment enough for it would be a way to solve a problem none of them have been able to solve for themselves. Anonymous September 21, 2008 at 1:12 am "Opposing the package is one thing. Anyone got ideas for what should be in an alternative?" Dean Baker has a progressive bailout proposal < href a="http://tpmcafe.talkingpointsmemo.com/2008/09/20/progressive_conditions_for_a_b/">Dean Baker Bailout Proposal<=a> mencey September 21, 2008 at 4:52 pm In the Swedish cas it appears to me that the problem was a devaluation from a PEG while the banks were properly run, they could have done nothing about that. The current US case is different, the bank creates the mess themselves Comments are closed. Tip Jar Please Donate or Subscribe!