Takes on the New, Porked-Up Bailout Bill

This comes from an e-mail titled, “It’s worse than I thought,” from a reader with a good deal of inside-the-Beltway experience:

It’s Christmas…This has NOTHING TO DO WITH THE ORIGINAL CONCEPT. In fact very little has really been changed with respect to the original Paulson plan…The new PIG has everything to do with Senate Finance. There are 300 pages of tax breaks.

McCain and Obama are out on the campaign trail…What are they saying???

Washington back the bill!

Yet this thing is nothing but “earmarks,” which McCain said he would veto…and “business as ususal” which is the entire basis of Obama’s Change campaign.

And I’ve been watching CNBC all day…the finance talking heads can’t even begin to understand what’s happened here. This is a stunning power grab by a small group of US Senators…one assumes with the backing of Bush.

Pelosi had her chance…Paulson got down on one knee. When she couldn’t deliver, it became a Senate issue and they have overwhelmed everyone…

Incredible…hey added hundreds of billions to this with all the crap…..

And from another reader from his (no doubt in vain) communiques to elected officials:

Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession. What the spending programs have done, however, is put Japan’s government in poor fiscal shape. The “on-budget” government spending has caused public debt to exceed 100 percent of GDP (highest in the G7), and even more debt is apparent when the “off-budget” sector is included. Japan tried changing the rules, they took assets, they tried to prevent them from going down.

Look at the Japan Stock market ever since. Despite all that money the market continued to go down, as will ours. The scare tactic being used in washington would lead you to believe otherwise.

Of course Jean Claude Trichet wants you to approve this. Deutche Bank, UBS, etc.. are all knee-deep in these credit derivatives…He wants us to bail out them, meanwhile he refused to cut interest rates this entire time which would have been favorable to the dollar. Now we are facing a real threat of hyperinflation if congress allows this plan to proceed. No amount of jiggering this bill is going to make it right.

However, Doing Something is clearly taking precedence over Doing Something That Might Actually Work.

McDonalds now has less of a chance of defaulting on his debt than the United States. That’s correct, we are now facing the very real possibility of having our own national debt downgraded.

Lastly, PLEASE do yourself a favor and look at your own economic data. Personal Savings Rate, Household Debut and Foregin ownership of our debt: Just look at these 3 graphs then ask yourself a few questions about this bailout


Like the monolines, the US will be seen as a less than stellar credit long before any debt downgrade were to occur. Japan’s yen debt rating was single A before recent upgrades.

And from another reader who worked in the financial markets and now has a ringside seat:

The main concern is keeping the Fed autonomous, independent and the ” lender of last resort”. It is not the money, it is the administration of the money. The Treasury’s rescue, to take from legal custody by force, is wrong. The Treasury’s choices with whom they will do business is telling. Carlyle executives moving into powerful positions at Freddie Mac, Wachovia and on and on. This does not bode well…

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  1. Anonymous

    We need an amendment to the effect that, if the US and EU pass their respective “banana republic” bailouts, they at least agree to destroy all their nukes.
    Then, at least, we can be insolvent, but safe.

  2. Crust

    I’m sure McCain believes wool research (a tax earmark in this bill) is every bit as important as important as seal DNA research (a Palin earmark and therefore by definition a good thing). Unlike say bear DNA research (McCain’s favorite earmark bugaboo).

  3. Anonymous

    Yah, I just called my Congressman Norm Dicks and talked to Colin Sheldon about this addition of Black Lung Hocus Pocus, etc, but they seem to be brainwashed into thinking that worthless derivatives are going to make money for Buffett and that in 5 years, the next President can always ask for more money to pay off these bad obligations.

    Re: —There is hereby appropriated to the Trust Fund an amount sufficient to pay to the general fund of the Treasury the difference between

    (A) the market value of the outstanding
    repayable advances, plus accrued interest; and
    (B) the proceeds from the obligations
    issued by the Trust Fund to the Secretary of
    the Treasury under paragraph (2)(A)(i).

  4. Anonymous

    Guess we go the answer on the short selling ban, GE is going issue 12 billion in stock and short themselves. No ban expiration…

  5. doc holiday

    I just occurred to me that this Bailout Proposal is being engineered just like the same pool of assets which created this mess, i.e, we have massive Fannie pools of obligations that are linked to other pools and classes that are backed by pools of collateral, which are all guaranteed and insured by pools of risk free pools that connect unlimited money to unlimited defaults. The scale of this asset pool problem will not be solved by pouring liquidity into a bottomless pit of debt.

    Amen and God Bless America

  6. Anonymous

    Of many things I’ve been reading (in the revised bailout); here is one that just gets my goat. On TV they’ve been touting, yes, you will now have $250,000 in insurance BUT IT’S ONLY TEMPORARY PEOPLE! READ IT!:


    (1) INCREASEDAMOUNT.—Effective only dur-
    ing the period beginning on the date of enactment
    of this Act and ending on December 31, 2009, sec-
    tion 11(a)(1)(E) of the Federal Deposit Insurance
    Act (12 U.S.C. 1821(a)(1)(E)) shall apply with
    ‘‘$250,000’’ substituted for ‘‘$100,000’’.

    Yeah, I’m with Kady – this is f’k’d up as the city people say.

  7. Anonymous

    Yet Treasuries are well bid though all this today.

    So the notion that “the US will be seen as a less than stellar credit long before any debt downgrade were to occur” is not one shared by the Treasury market.

    PRICES mean something. Sometimes more than theoretical outcomes.

    However, PRICES are conveniently ignored completely when they get in the way of theoretical outcomes.

    It isn’t enough to simply say “flight to quality” because that is an inherent contradiction in the argument that states eventual “debt downgrade”.

    Markets are more powerful than governments and “mere opinion”.

  8. Abbott_Of_Iona

    May God have mercy on the next President of the USA.

    He's going to need mercy, & luck because commonsense just left the building.

  9. Anonymous

    “Markets are more powerful than governments and “mere opinion”.”

    Then let the Market save us.

  10. Anonymous

    Oh the next president, effectively, is Paulson!

    That “other guy” whoever he will be, will be a puppet.

  11. fightingthetide

    I am very interested in the US credit rating question — it’s clear to me that a literal downgrade is something that may be postponed almost indefinitely, so what is the real test or metric of US creditworthiness? How would you convince a skeptic that we have achieved de facto sub-AAA status, when it comes to that? Grateful for any help on this.

  12. fred55

    interest rates encapsulate the expectation of repayment. if the yield on treasuries exceeds that of AA corporates for any extended period of time thats a de facto AA or lower rating.

  13. maynardGKeynes

    I suspect that most of what you are seeing here is not earmarks, but a procedural oddity. As you know, the Constitution requires that all revenue measures must begin in the House of Representatives. Because the House did not pass a version of the bill, in order to consider the Treasury proposal the Senate had to take a totally unrelated bill and “amend” it by in effect adding the text of the Treasury plan. They obviously have added a few provisions, but most of the totally irrelevant material was from the unrelated House bill and will be removed when the Senate bill is sent back to the House of Representatives,

  14. CTMM

    Can someone wiser point me to data were we can see who is actually buying treasuries, and in what amounts?

    As long as we have the printing presses going, whats to stop the treasury dept. from buying it’s own treasuries through some convoluted soi-distant arm of the banking sector to keep prices propped up?

    I’m sure people (other countries) would notice eventually, but it seems like you could get away with it for a while…

    Sorry if this is a stupid question.

  15. Abbott_Of_Iona

    fightingthetide said…

    “I am very interested in the US credit rating question”

    Can’t help you on that. But if you find the answer let me know.

    These would be the same credit agencies that thought that sliced and diced vacant houses in Florida and California were AAA.

    I think the Treasury might apply a little pressure.

    Slightly of topic, and of more interest to me, is that the Irish Government is about to provide a guarantee for €400Bn of bank debt for the top six institutions in Ireland.

    That’s 2.5 times the entire GNP of the country.

    Most, if not all, of these institutions have in the last five years become critically exposed to the Irish property market.

    A property bubble which probably exceeds that of the USA.

    Are we all doomed?

    Oh, and they don’t even get Buffet like warrants.

    Does anybody have an educated guess on how much a monoline would charge to insure €400Bn?

  16. kona

    I read a book the other day called Predictably Irrational, b yDan Ariely, who teaches behavioral economics. In this, he has experiments about cheating, and how people are hesitant to cheat with cold hard cash — but cheating is easier when steps are placed in-between you and the loot. He uses Ken Lay and Enron as example of off shore entities and SPEs and structure which removes the inclination to be honest.

    This is what TARP is all about — it creates distance from the piles of shit that smell and it creates the illusion that there is an honest structure, it engineers the mechanisms where people can’t watch the peas and shells.

    The impulse to steal $700 Billion or $7 Trillion that is removed into a structure, will be a new form of government, which will allow corporations to be unaccountable in this socialization of gambling debts — which will become a burden to taxpayers in America from this day forward. America was just sold for $700 Billion, and Congress and The senate sold it to wall street!

  17. EvilHenryPaulson

    re: United States debt, and ability to service
    From The Economist, http://www.economist.com/finance/displaystory.cfm?story_id=12306060
    [chart] United States Total Debt to GDP (all government, corporate, household)

    FYI, Japan's $100tn smattering of trickle down bailouts would be ~$3tn on a per capita basis.

    > Direct stimulus ($300bn once, a second $300bn was delayed but will be ressurected),
    > Indirect stimulus (expect various tax cuts as they try to spread/hide the costs of the stimulus),
    > Direct bailouts (FDIC money spent, $42bn to Citi, $30bn to to JPM, etc, + expected $700bn,=~$1tn) and
    > indirect bailouts (assets the Federal reserve has taken onto its balance sheet)
    > we are not far from $2tn at present, although obviously the Fed won't have a 100% loss rate on the crap it is taking for collateral

    Keep in mind Japan spent that over a decade and had more room to maneuver because even today their total debt to GDP is less than the United States in large part because of consumer saving

  18. Anonymous

    Now would it have been worse to ram through the original Paulson power grab?

    Also, how does one tell a wooden arrow for use by a child from one for use by an adult?

  19. ty

    The sad thing is the restriction on the diameter of the wooden arrows. They have a figure of 5/16 of an inch.

  20. Douglas

    maynardGKeynes at 4:27PM

    Is the “pork/earmarks” that folks are hysterical about items that were in the original Bill being amended, or are the “pork/earmarks” items _added_ to the original bill (and hence, the alarm) by the Senate?

    That would go a long way towards determining if the “pork/earmarks” do in fact get stripped out, as you claim.

  21. don

    The bailout, I mean rescue plan, can be seen as nothing less than a new Ponzi scheme. It works like this:

    Fed as only lender, in an attempt to keep the financial system from imploding;
    TARP needed to keep Fed balance sheet intact so that it can continue as only lender;
    Treasury will need to significantly increase the amount of Ts (public money) auctioned to fund TARP;
    Panic serves to encourage T. buyers, especially for bills;
    This represents a liquidity trap: TARP recipients of Ts will hoard cash to buy Ts: rinse and repeat;
    This results in drying up of lending to corporations/crowding out private capital – no new credit lines;

    The Fed becomes a holder of private capital, the later of which is now frozen to protect that capital from deteriorating, The rollover scheme will restrict even more lending in the private sphere for purposes of keeping the financial sphere on life support, but with the consequence of furthering the deterioration of the ‘real’ economy.

  22. FairEconomist

    My thoughts exactly, Don. Plus the durations target the drawdown precisely on the capital we need most. We’re desperately short of 3 month working capital, and here comes Paulson to take $700 BB of what we’ve got left away and dump it in the mortgage industry. I don’t think you could devise a worse plan. We might be better of if he *did* steal it.

  23. PrintFaster

    There is only one of the St Louis fed charts that bothers me: The one that shows that foreigners have quit buying our debt. Our trade balance continues to accumulate, yet somehow the treasury debt did not go up?

    Where did the trade balance go? Real assets? Fannie and Freddie debt? Stocks? Commodities?

    I think the answer is commodities. The plan with the treasury is to bring back the foreign debt to the US market by cleaning up real estate so that mortgages can be sold off. The real answer may be that that foreigners are shunning all forms of US debt including Ts.

    The result can only be price inflation, which is due to pent up monetary inflation which has beend deferred into debt.

    The debt chickens are about to roost and they are dropping things everywhere.

  24. fred55

    it would almost surely be an impairment of contract, and unconstitutional; if it weren’t, it would result in a 5th amendment due process requirement and taking requirement that persons were made whole, and untold due process procedures to unwind everything, including the protection buyers to get back the premia they paid adjusted for the nonlinear upfront risk…tax positions readjusted for years back…

    aint gonna happen

  25. FairEconomist

    Anonymous @ 6:04

    1) Dislike for negating contracts especially on that scale
    2) We’ll still get massive bankruptcies from companies on the wrong side of the cancel
    3) (Probably most important) Many European banks rely on AIG guarantees to treat bonds as regulatory capital. No guarantees = massive undercapitalization in Europe.

  26. Yves Smith

    On the ratings question: Moody’s had said months before the events of the last month that the US was at risk of losing its AAA in the next ten years.

    As for current pricing of Treasuries, people are running for cover, and as Don implied, the operation of some of the Fed facilities is also increasing the demand for Treasuries. And per the David Rosenberg piece we featured (he is the North American economist for Merrill), if you believe we are getting deflation (he does), longer-dated Treasuries are a buy because yields will have further to fall.

    Part of Moody’s downbeat view was based on projections of growing deficits based largely on iraq. We now have falling tax receipts and a lot more spending in the mix.

    Now if we could fund ourselves internally, like Japan, we could have deteriorating credit quality and still have very low interest rates. But we may be on the way to seeing de facto competitive devaluations (another feature of the early Depression). You’d normally expect to see higher rates for the dollar ex other factors, not immediately (that tsunami of increased supply of Treasuries won’t kick in for a while) but we are way outside historical norms here. We could see perverse outcomes for longer than one might normally expect.

  27. Anonymous

    Hey, maybe they’ll rate on a curve. If the discussions of the mortgage situations and the EU restrictions hold true, our credit may suck – just not as much as euro.

  28. Abbott_Of_Iona

    “But we may be on the way to seeing de facto competitive devaluations “


    You scare the s**t out of me

    Anonymous said… .

    “Hey, maybe they’ll rate on a curve. If the discussions of the mortgage situations and the EU restrictions hold true, our credit may suck – just not as much as euro.

    October 1, 2008 8:47 PM”


    What exactly is it that you don’t understand about competitive devaluation?

  29. melpol

    The best way that we can get our economy quickly moving again is not by bailing out the big bad banks with 750 billion dollars but by giving that money to the homeless. It is estimated that there are three million homeless people in the United States that are costing the government billions each year to feed and shelter them. A grant of 250 thousand dollars to each person that can prove that they have been homeless for over a year would cost less money then the amount that the government is ready to waste on bailing out the banks. The results would produce the greatest spending spree in American history and jump start our economy. An added benefit would be that many of the homeless would purchase homes that have been foreclosed and bring added life to the housing market. Some Americans would be envious of the new found wealth of our most unfortunate citizens, but instead they should welcome their large contribution to our economy.

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