Bailout or No Bailout?
I get the sense that opinions on any kind of bailout, or rescue plan, of Wall Street run the gamit around here, whether you are a Republican or Democrat, whether you are a liberal, moderate or conservative. It is much like the immigration issue, where there really was never any unified Democratic v. Republican stance on the issue. Both parties were, and are, divided against each other.
The American people seem to think something has to be done, but they hate the Bush/Paulson plan:
“Do you think the government should use taxpayers’ dollars to rescue ailing private financial firms whose collapse could have adverse effects on the economy and market, or is it not the government’s responsibility to bail out private companies with taxpayers’ dollars?”
Use Taxpayer Dollars 31%–55% Not Government’s Responsibility
“As you may know, the government is potentially investing billions to try and keep financial institutions and markets secure. Do you think this is the right thing or the wrong thing for the government to be doing?”
Right Thing 57%–30% Wrong ThingAs you may know, the Bush administration has proposed a plan that would allow the Treasury Department to buy and re-sell up to $700 billion of distressed assets from financial companies. What would you like to see Congress do — [ROTATED: pass a plan similar to what the Bush administration has proposed, take action but pass something different from what the Bush administration has proposed, (or) not take any action on this matter]?
Pass Bush Plan – 22%
Pass Different Plan – 56%
Take No Action – 11%
I want everyone who reads and contributes to let me know their thoughts on a proposed bailout.
Here are my thoughts below:
- Something has to be done, if only to instill confidence in the market and in the banks. We are currently in the midst of a bank panic. The markets are collapsing. If they completely collapse, we will be in the midst of a depression. There will be a massive loss of wealth and jobs.
- The Bush/Paulson bailout plan is unacceptable. It is a nonstarter. Tear up those three pages.
- The $700 billion dollar bailout figure is unacceptable, for it was literally drawn from thin air. There is no reason the bailout has to be $700 billion. Indeed, at most, we should break this down into installments. $150 billion to start, and then if more is needed, then we will revisit it at that time.
- Any plan must include equity for the taxpayer.
- Any plan must include some kind of programs to help keep people from defaulting on their ARM mortgages.
- Any plan must include reinstituting all regulations over the markets that have been removed during the last thirty years of Reaganism.
- There must be criminal investigations into the failures of the investments.
- Not one corporate executive should receive a dime. In fact, I think they all should be fired without severance. And if they cannot be fired, then they should be made to suffer the same indignities that your average American suffers when they file for bankruptcy, like attending credit counseling.
James Glabraith has another idea:
Now that all five big investment banks — Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley — have disappeared or morphed into regular banks, a question arises.
Is this bailout still necessary?
The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They’re called “loans.”
With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn’t, the FDIC has the bridge bank facility to take care of that.
Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund — a cosmetic gesture — and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary — as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can’t save everyone, and those investors aren’t poor.
Galbraith then details a plan to invest in the infrastructure for renewable energy, which will create jobs that will help us 1) get off foreign oil, 2) clean up the environment, 3) lower fuel costs, and 4) create jobs that will help pull us out of the coming severe recession. I think this is a great idea. And it is something to do that will instill confidence.
I’m with Galbraith. Even though your modified bailout uses the leverage provided by the intervention to make some needed changes, ultimately the taxpayers are still rewarding bad actors.
Side note: Even Galbraith gets this wrong, “The point of the bailout is to buy assets that are illiquid but not worthless.”
That is the underlying fantasy. Those loans are as worthless as Confederate script – but I guess everyone has to go along pretending that they represent is some value for some lucky investor (us) somewhere on the distant horizon.
Take a look at the mechanisms the RTC used for the last S&L crisis… it’s devilishly complicated.
en.wikipedia.org/wiki/Resolution_Trust_Corporation
This time around the difference is the financial market, including overseas players, have spun a web of derivatives based on phantom assets. Those players need to take the hit and not be bailed out.
Also, 40% of the bad mortgages are held by landlords and speculators; those people need to take the hit too. Too bad.
The bailout needs to go to homeowners, not speculators.
The underlying cause is the low growth of real wages, which has interrupted the normal growth of housing value (also known as “The American Dream.”) That is what needs to be bailed out.
What I’m still uncertain about are the consequences. What happens to us if we bail them out or if we don’t bail them out?
Those loas are as worthless as Confederate script
The loans need to be rewritten so they are affordable.
I don’t like the bailout one bit. The logistics of this are tough, but I’d rather unwind these bad securities and renegotiate the loans based on current housing values and some fixed rate interest. The banks take the write down of the value lost.
Alternately, if there needs to be a bailout to get more money available to lend, I’d use the Buffett model of investing in Goldman Sachs this week. Give them the money, take a serious equity stake (and for taxpayers it ought to be senior debt or other instrument at the top of the payback chain) and a couple of pounds of flesh. Buffet is clearly in it make a few buckets of money and so should we. And, I think, you get a more reasonable place to address Executive compensation since I have doubts of the legality of legislating compensation in the private sector.
At the end of the day, though — it is still pretty clear to me that you can infuse whatever money you want into the system, the bad loans are still there and still bad and no one is really addressing that.
It’s cheap credit that got us into this mess. So the solution is….more cheap credit so we can continue our debt ridden lifestyles. Then what happens? More credit? We live in a cyclical profit and loss economy. Its a time for loss.
The market is working itself out. It will eliminate the bad debt and get back on solid ground. WaMu failed last night, yet this morning the sun rose and people went to work. No mushroom clouds in the sky. The banks who made bad decisions will fail. The FDIC will step in and clean up the mess.
How about we end this ridiculous war and start slashing our overblown governmental system. The solution is not debt. The solution is to live within our means.
I know I sound simplistic….but…no bail out. I really do think the economic cleansing I referred to earlier has been a long time coming. Americans have grown so smug w/ their spending, credit, and acquisition that this may be the ice water in our face we all need to return to a principled economy, and sound foundation of correction, and faith in the free market and American resolve/sticktuitiveness. The interference, regulation, bail-out today guarantees interference, regulation, and bail-out tomorrow. Incremental interference will result in more rule changes as we go. So much for a free market we have fought, defended and prided ourselves on. Don’t be fooled. Let the chips fall where they may….the first cut is the deepest and the hardest….but the kindest. I have more faith in Americans and their resiliency and entrepenurial spirit, then I do in American legislators who have understandably been tainted, by overexposure to virtual money, and the hypnosis of Wall Street. We will all lose..yes…but not piece by piece, as a government mandate with rule changes at every turn. Instead, we lose, we cry, we readjust, we get to work, we rebuild, we REMEMBER, we are America–and every other country (and yes I’m talking China and Venezuela too), will still wish they could capture and duplicate what makes America work—Americans–not legislators. Fire away DL!!! I’m sticking to my post…
Someone in the mix needs to release what Paulson & Bernanke said behind closed doors that caused such a huge panic…..
Pandora’s question is the big question….
As much as I hate to bail these assholes out, a lending freeze (esp on a global level) has the potential to tank too many economies…..
& all the global markets are watching this play out….waiting for action….
something has to be done….
the players at the table need to share with the American people what the hell the Fed & Treasury Dept SAID to them in the 1st place….
While we are all against the bailout, this is not just too free and easy consumer credit. Businesses are having a hard time getting short term loans for expansions or R&D (there was a great report from Silicon Valley on NPR this AM on how drastic the credit crunch is).
But you still have an American economy that is fueled by Americans buying stuff — not making stuff to sell — and credit makes all of that happen. I don’t like that one bit, but I think that this is the precipice that Paulsen is looking out over.
Bush is back out with his 9/11 suit on. “We need this bailout or I’m going to go down in history as a Presidential failure”.
Somebody need to break the news to him…nobody gives a shit what he thinks.
The first thing that has to be done is to define the problem, and I don’t tyhink that that has happened accurately yet. The biggest problem is that securities were bundled and traded based on inflated estimates of return for home loans that were, themselves, based on hugely inflated valuations for homes. Even if you stabilize the financing of ARMs, those loans are still based on inflated home values. This means that the people who bought at the 2003-2006 inflated values are still going to wind up having to pay off loans that are far larger than their homes are actually worth.
Additional problems exist. The people who bought with far less than 20% down are also on the hook for mortgage insurance, which can be around 1% of the loan value, per year. Thus, if you got a mortgage for $300,000, your mortgage insurance payment alone might be $3000 a year. This insurance protects the lender, who can’t always expect to recover his money through foreclosure if there’s no equity in the home. With falling home values, even if you had a significnt amount of equity built up, it just vanished if you can’t sell the home for what it used to be worth.
For this supposed bailout to work, you would have to reassess millions of homes sold between 2002 and 2007, and rewrite the mortgages for the reassessed values, or it will be those homeowners who are paying the bulk of the bailout, even with stabilizing their ARMs to reasonable-rate fixed loans.
A part of me, and many here, agrees with you Joanne. No firing away is needed.
The only problem with the “time to clean up our act” thinking is that the “our” in that phrase tends to mean “poor people.”
No bailout. Lessons need to be learned.
No Jason it doesn’t. “Poor people” have already mastered the art of living paycheck to paycheck…or getting a second job. They haven’t stepped into the world of portfolios and mortgages. If they have, they ain’t poor–lower middle class perhaps but not poor.
The “our act” is a great modifier!!! It does tend to strip away the facade of wealth and expose our real worth–oh well–the ice water cometh…
How leverage works:
A mortgage bank called Shady Loans loans $1 million for a real estate deal. Shady Loans makes money on the transaction via fees, etc. Shady Loans then sells this loan to Derivatives ‘R Us, and collects more fees. They have now pocketed a tidy profit and have no more responsibility for this loan. They don’t care if the loan is paid off or not.
Now, Derivatives ‘R Us uses this loan as collateral to borrow $10 million from Big Bucks Bank so they have leveraged this loan 10X. Big Bucks Bank now has a $10 million loan as an “asset” on its books that it uses as collateral to borrow $100 million from Super Lender Inc. The $1 million is now leveraged 100 times.
Then comes the unwind…
One of Super Lenders depositors needs $1 million. To get the cash, Super Lender decides to call its $100 million loan to Big Bucks Bank. Big Bucks Bank doesn’t have the cash (no liquidity) so it calls its $10 million loan to Derivatives ‘R Us. They don’t have the funds (remember it only had a $1 million loan as collateral) so they try to sell a bunch of their other loans quickly to raise the money. Unfortunately, since there are so many bad loans (toxic assets) made by companies such as Shady Loans for sale, the only offers that they get are only for a few cents on the dollar. So they have to sell at “Fire sale” prices, and that won’t cover their debts.
So Derivatives ‘R Us goes bankrupt. Now Super Lender can’t pay, so it goes bankrupt and Super Lender’s depositor is left with pennies on his deposit or nothing.
The “Bail Out Plan” wants the Taxpayers to buy these overleveraged assets at non-fire sale prices to keep the banks solvent, get cash into the system, and stop the fire sale, which is forcing the undervalue of good assets. The hope is that the gov’t can sell any “good” assets it buys later at a profit (when the fire sale is over).
I’m not sure what should be done. I think the banks need to fail before we mop up the bad assets. If they can hold them “until maturity,” let them, especially if they don’t want the regulations that come with a bailout.
So here’s my proposal. A bailout for banks that want them, but is very punitive. For example, the CEO and other executive officers get absolutely no pay for 2 yrs. – $0. If their situation is extremely dire, they’ll take the bailout from the government. If they feel they can do better they will not take the bailout. We’ll seize the assets of banks that fail and we should have an entity (nonpartisan) that will help the mortgage holders do work-outs.
In the meantime, we strengthen the predatory loan act and put in place sensible regulations.
So, I think some things should fail and we should be ready to help people in distress. We should also make sure the economy continues to function – perhaps become a lender of last resort?
hope is that the gov’t can sell any “good” assets it buys later at a profit (when the fire sale is over).
Hope or scam?
I heard the actual ratio that Lehman Bros. & Bear Stearns (and other big players)were working on was something like 37:1(liabilities:assets). Pretty scary.
I still can’t figure out why they didn’t see this debacle coming sooner than later?
I guess it’s true. You can’t teach common sense.
Hope or scam?
I’d describe it as wishful thinking. It really depends on the price that they pay for the “toxic assets” and the value of the underlying collateral at the end when they go to sell them (after the smoke clears).
But you can see what the gov’t is trying to do. If they had had the regulations and enforcement in-place to stop the bad loans in the first place and then prevent the massive leveraging of both the good and bad loans, then we wouldn’t be here. This crisis was entirely preventable.
Good old McSame his offer yesterday at the white house was for less Regulations and more TAX CUTS for Wall Street.
he truly is a senile old man
I think they actually did see this coming. I think they were trying to hold off this mess until after the election.
Unstable Isotope:
Why would a CEO stay?
While everybody is trying to punish the CEOs, the problem is still that you need good CEOs to steer the companies out of this mess. So if you fire the ones that got into the mess, how do you attract good ones to help get out? If they have a choice between a non-distressed firm offering $2 million+ or a distressed firm with a gov’t controlled or capped compensation of $400 thousand, where do you think that they will go? It is still a free job market, and you can’t force people to work for a firm.
I think we need to regulate the market, enforce the laws, and leave compensation up to the Boards.
An acquaintance I know who used to work on Wall Street swears that the big wigs have known for a long time the bubble would burst….
they kept up the game “knowing” they would be helped out in the end by the Fed….
These assholes do not deserve the tax-payers help!!
but something still has to be done……
A good CEO shouldn’t need a bailout, in my opinion. Let them leave!
UI:
Sure, I agree, let them leave – kick them out of the plane with no golden parachute. But how are you going to get good ones to replace them if you don’t compensate them according to their competitive free market value? They are free agents, after all.
NO BAIL OUT. No reason.
The pigs have been at the trough way too long.
For what it is worth-here is the way Sweden handled a similar crisis in the early 90’s
http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html
I don’t believe the mortgage backed derivatives are the thing they are concerned about. They are stressing the balance sheets of major financial institutions, but what they are trying to head off is the looming collapse of Credit Default Swaps.
The shit really hit the fan when Lehman collapsed. When Lehman collapsed they had money they borrowed in the commercial markets. Tons of it. When a firm goes bankrupt they do not pay their loans, what is left of the firm is carved up and depending on the seniority of your debt in the credit food chain, you may get some or none of the money you are owed.
What companies do to protect their debt is buy Credit Default Swaps. AIG for example wrote many for loans from Lehman. It i like an insurance policy, but much like the MBS are not required to be backed with assets.
So when there is a default the company who wrote the swap owes the counter party the balance of the debt they are owed. These were incredibly lucrative (as no one ever defaulted) and they were traded like securities (Lehman did a lot of the trading which exacerbated the situation because there was no one to settle the deals executed with them on the Friday before when they crashed).
So, the point of this is that AIG was on the hook to pay incredible sums of $$ to Lehman bondholders. Between being beat up by their mortgage losses and never properly capitalizing to cover potential losses they could not pay on the swaps. That would have been the contagion. Other institutions would have lost on those loans, if they defaulted on loans as a result then the same web of problems would start again, except if there was another company that writes swaps that got burned it would spread more…
I believe the idea behind the bailout is to shore up the balance sheets of the banks to prevent another collapse because the ‘insurance’ everyone has on these loans is not insurance, but a derivative and in a time of market turmoil become useless (never mind that is ultimately the point of having them in the first place).
If you ask the no regulation crowd why they would do such a crazy thing they will explain that this scheme adds liquidity to the market (it is not sitting in T-Bills as capital to back insurance) and is out in the market making things happen. All of which is true – but when those thing are asset bubbles they add gasoline to a fire.
The residential real-estate market is like $12Trillion. I heard today that there is like $34Trillion of debt backed by credit default swaps. You can see where that coul get really bad fast.
To loop back to the question Pandora asked (sorry, it took a while) there is no guarantee the bailout will help. The reason they are sneaking the loan guarantees for the auto companies in before recess is so that that they do not default and collapse the market. The reason the Treasury and the Fed want to help the balance sheets of these firms is to prevent these issues (which like the mortgage mess they brought completely on themselves).
This is part of why credit is drying up. If you know someone may default and you have no confidence you can hedge against the losses in the Credit Default Swap market, why would you lend? If you have a $4bln line out to Chrysler and you are not sure if AIG or Goldman’s Credit Default Swaps are any good you would not be looking to put more money on the street in case should need to write it down and take it out of your capitalization as a loan loss. So firms that thought they had their debts ‘insured’ don’t, and the firms that ‘insure’ them will blow up should they ever need to pay.
There is no guarantee whatsoever that this bailout will prevent this. It would probably slow it, and it would leave more banks standing than if they didn’t, but we may be throwing money in a hole.
Here is a good article:
A Better Bail Out
And a little summary of how we got here:
The Dummy’s Guide to the U.S. Financial Crisis