David Leonhardt of the Times presents a useful overview of the rescue debate. Here is his view on fair value and market value:
Based on the underlying fundamentals (like the current foreclosure rate and the one forecast for the future), many of the securities appear to be worth something on the order of 75 percent of their original value. But thanks to the fear now gripping the market — not necessarily an irrational fear, given that most forecasts have proven far too sunny over the last year — very, very few of those securities are trading hands. Among those that have, the sales price has been roughly 25 percent of the value.
Which price is the government going to pay? As Mr. Colander puts it, that’s where the action is.
It clearly shouldn’t pay 75 cents on the dollar, or anything close to it. That would mean the Treasury Department — which, in the end, is really you and me — was assuming nearly all the risk. But it probably can’t pay 25 cents. That might fail to fix the credit markets, because it would do relatively little to improve financial firms’ balance sheets. Firms might then remain unwilling to lend money to businesses and households, which is the whole problem the bailout is meant to solve.
However, I worry that he remains at too abstract a level in his discussion of equity stakes:
The most obvious solution is to pay more than 25 cents on the dollar and then demand something in return for the premium — namely, a stake in any firm that participates in the bailout. Congressional Democrats have been pushing for such a provision this week, and it’s one of the most important things they have done.
The government would then be accomplishing three things at once. First, it would take possession of the bad assets now causing a panic on Wall Street. Second, it would inject cash into the financial system and help shore up firms’ balance sheets (which some economists think is actually a bigger problem than the bad assets). And, third, it would go a long way toward minimizing the ultimate cost to taxpayers.
Why? The more that the government overpays for the assets, the larger the subsidy it’s providing to Wall Street — and the more it is pushing up the share prices of Wall Street firms. As Senator Jack Reed, Democrat of Rhode Island, notes, the equity stakes allow the government to recapture some of the subsidy down the road. It’s a self-correcting mechanism.
On concept, yes, although if, for example, Treasury gets a 25% stake they only recapture 25% of the premium.
However, regardless of its intentions and advertising, the Dodd proposal (which is the only text I have found describing a mechanism by which firms give up equity) really does something quite different.
Other problems with the notion of an automatic equity kicker - Treasury may not be bidding a premium price for every asset out there; another of their goals is to create liquidity in the market. If Treasury is going to be bidding for assets, vulture fund heroes may actually try to fly in in front of an impending $700 billion buy program and scoop up a few distressed assets on the cheap. Is that a bad thing if they do? If an actual market with multiple buyers and sellers develops for some of these assets, Treasury will view it as a success - do they also need to demand equity in all the sellers?
Furthermore, as Paulson said repeatedly in his testimony yesterday, if the government does demand equity all sorts of somewhat healthy sellers will decline to participate. That may make sense of the goal is to direct premium prices to the sickest sellers, but it undermines the notion of paying a fair price for some assets to kick-start the market.
Well - the first step would be for Congress to present en equity proposal for public review. The Dodd proposal is detailed but absurd.
ISTM this debate between competing proposals (with a "given" assumption Congress will do something) is morphing into a "whether or not" discussion in public political statements, which is really two completely different subjects. It'll be interesting to see if this derails the whole process as the "anti" crowd seems to sell better on the airways. I'd say that's more likely since neither of the two proffered plans are particularly attractive (at least to the untrained eye).
Posted by: Cecil Turner | September 24, 2008 at 08:53 AM
Here's another propasal from Hussman funds. He says this can be taken care of with no public $$$.
The case of Fannie Mae and Freddie Mac was special in that government had already provided an implicit guarantee to their bondholders, so that bailout couldn't have been done otherwise without harming the good faith and credit of the government, but it's absurd to tell Wall Street “send us your poor and your tired assets, and we will tend to them.” The gains in financial stocks we have observed in the past two days reflects money that those firms expect to be taken out of the public pocket.
Posted by: Pofarmer | September 24, 2008 at 09:00 AM
In summary, the Treasury proposal to address current financial difficulties places corporate bondholders ahead of the public, rewards irresponsible risk-taking, and sets a precedent for future bailouts. Moreover, we know from a long history of economic experience across countries that a major expansion of government liabilities is invariably followed by multi-year periods of extremely high inflation, particularly when it is not matched by a similar expansion of economic production. Such inflation would initially be modest because of the current weakness in the economy, but could pose unusual challenges to the United States in the coming years.
Congress can benefit the American public by maintaining a focus on responsibly assisting homeowners in distress rather than defending the stockholders and bondholders of overleveraged financial companies. It is essential to recognize that the failure of these companies need not result in “financial meltdown” provided that the “good bank” representing the vast majority of assets and liabilities is cut away, protecting customers and counterparties, so that the losses are properly borne out of the capital base of the companies that incurred them.
Again, everyone knows that a policy of bailouts will increase their number. By choosing who bears the losses for irresponsible decisions at these companies, Congress will also choose the scope of the bailouts that follow.
Sincerely,
John P. Hussman, Ph.D.
President, Hussman Investment Trust
He hits the high points, I think.
The two main things that are concerning me right now is that I think the policies being looked at are VERY inflationary, AND that by effectively propping up the already overinflated realestate market the govt is screwing those of us that said "this is crazy, I'll buy later when it comes down a little bit."
Personally, I'm kind of tired of getting screwed by the govt.
Posted by: Pofarmer | September 24, 2008 at 09:07 AM
Along the same lines, Bill Gross, writing in today's Washington Post in support of the bailout (according to Gross, it is really a bailout of Main Street), dismisses concerns about the taxpayer overpaying for these assets because "There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets...".
But, as I pose the question here, if a fair value can be established, then why do taxpayers have to buy these debts? The problem is not the existence of these debts, the problem is the ripple effects caused by uncertainty about their true value. Remove the uncertainty, remove the need for a bailout. Am I missing something?
Posted by: steve sturm | September 24, 2008 at 09:08 AM
How do you overpay in a reverse Dutch auction? That would suppose that everyone would bid assuming that everyone else is going to bid way high so they can get away with a way high bid. Does that fit any pattern of human behavior that has been exhibited in the past?
Posted by: GMax | September 24, 2008 at 09:21 AM
Remove the uncertainty, remove the need for a bailout. Am I missing something?
The assets are going down in value instead of up. Just knowing that they are "worth something" right now does not remove the uncertainty how much they are going to lose.
Posted by: boris | September 24, 2008 at 09:22 AM
Remove the uncertainty, remove the need for a bailout.
I think that's about right from what I've seen the last couple days.
Posted by: Pofarmer | September 24, 2008 at 09:22 AM
The assets are going down in value instead of up. Just knowing that they are "worth something" right now does not remove the uncertainty how much they are going to lose.
From what I can gather, the "assets" in question are pretty much valued at zero, it's not going to get much worse. Allow the companies to operate with the extra leverage that marking these assets to zero causes. DO NOT allow them to add more leverage beyond that. Then figure out what the assets are worth and go from there. Seems to me the main thing to do is quell the panic and evaluate the situation.
God, now I'm starting to sound like TCO.
Posted by: Pofarmer | September 24, 2008 at 09:26 AM
God only knows why he'd accept the post, but they ought to put Warren Buffett in charge of sorting this mess out. He, at least, does understand the concept of fair market value.
Posted by: Dan Collins | September 24, 2008 at 09:33 AM
How do you overpay in a reverse Dutch auction?
A Dutch Auction is where the bidding starts high and works down and the first bid takes it. Is this what you are talking about???
Cause a "reverse Dutch Auction" would just be a standard Auction;0)
Seems to me, that for the Dutch Auction you would have to have nerves of steel. I've participated in plenty of standard auctions.
Posted by: Pofarmer | September 24, 2008 at 09:34 AM
"assets" in question are pretty much valued at zero
IMO the direction turnaround is why they are valued at zero. Not because the properties are worthless, but because nobody wants to buy loan aggregates when property is on the down escalator.
Posted by: boris | September 24, 2008 at 09:37 AM
What I am talking about was they said they were going to ask the lenders to submit their lowest price for the securities. If everyone had exactly the same securities then you would rank lowest to highest and stop buying where you thought the price became too rich for you. Doesnt that sound like a reverse Dutch auction ?
Posted by: GMax | September 24, 2008 at 09:41 AM
IMO the direction turnaround is why they are valued at zero. Not because the properties are worthless, but because nobody wants to buy loan aggregates when property is on the down escalator.
Well, true enough, but he underlying properties still won't go to zero(probably). Take it from somebody who saw farm prices retreate by 2/3's in the 80's though, I don't think this little 25% retracement(or whatever exactly it is) in home prices is the bottom yet.
Posted by: Pofarmer | September 24, 2008 at 09:45 AM
Doesnt that sound like a reverse Dutch auction ?
That sounds like a steel cage death match between the parties.
I've never seen an auction where the sellers get to value their product beforehand. Sure, there can be protection, but. Normally what would happen is that you would list a bundle of, whatever, and you would have bidders decide what it is worth.
The problem here is that you can't have an auction if you only have one buyer(the Fed). Will other entities get to bid on the packages?
Posted by: Pofarmer | September 24, 2008 at 09:49 AM
Memes that need to be stamped out:
This benefits Wall Street but not Main Street. -- This misstates the case. Main Street wants to have access to credit at home and in business.
Congress needs to assure oversight. -- The most ineffective, least popular congress in history, with its hands in the till, corrupt and unable to clean its own house, bent on winning elections rather than governing? Pulleeese. As Thomas Sowell points out, the saints are no more common in Congress than in Wall Street.
And on the other side, why should student loans and credit loans be included? Walter Williams reminds us what English philosopher Herbert Spencer said, "The ultimate result of shielding men from the effects of folly is to fill the world with fools." (H/T Carpe Diem)
The more Congress dawdles and meddles, the less confidence the markets have in any intervention. Paulson poo-pooed Schumer's idea of doing a little now and a little more in Jnauary, giving Congress a chance to geet in a few more licks.
Posted by: sbw | September 24, 2008 at 09:50 AM
All the scary words about soup kitchens and calamity make me suspicious, especially when they're coming from the same people who were in charge all along. I'd like to know what will really happen if things are allowed to just take their course. A recession? Big deal. They occur anyway. What else? Cheap real estate? I've been thinking of buying some. What else? (And don't tell me soup kitchens.)
If companies are allowed to get so big that their dumb decisions necessitate my bailing them out, then I want a law that limits their size in the future. I wasn't planning on buying bank stocks this year, and nobody would be bailing me out if I were on the brink of bankruptcy.
Finally, an equity stake means nationalization -- government owning the means of production. There are plenty of people who would love for the government to take a major equity stake in the health-care industry, but I'm not one of them. Why would I want an equity stake in the banking industry? I think I might rather have gold.
Posted by: Extraneus | September 24, 2008 at 09:58 AM
"Second, it would inject cash into the financial system and help shore up firms’ balance sheets (which some economists think is actually a bigger problem than the bad assets)"
That is, we could pay 700 Billion and the house of cards will fall.....anyway.
We have already breached the subject of nationalism with the advent of this crisis.
We have to inject money into the system, in the hope that this complicated mess no one really understands, so there is some chance we can control this monster.
Why not look at nationalizing the Medical Industry and the Petroleum Industry? That's a big cash cow. How about the Liquor and Tobacco Industries?. Add the humongous profit to the taxes of these financially prosperous giants, and you have some REAL captial.
It seems important to look at all avenues if we are screwed no matter what we do.
Posted by: CEO with Cash Flow | September 24, 2008 at 10:03 AM
I am telling you what I heard with my own ears Paulson say yesterday to the Senators. That is the plan, to the extent that they gave any details it was reverse auction.
My brothers and I use to do a similar thing with a candy bar. It was called "you cut I choose." If you dont make the cut pretty equal I am going to that the bigger piece and you get stuck.
It will be the same here. How bad do you want to get out of these? Price it low and get to the front of the line. Price it high and go the back and risk being left on the steps of the church as a bridesmaid.
Posted by: GMax | September 24, 2008 at 10:11 AM
I'd put Cathyf in charge and let her do whatever she thinks best. There. I said it.
Posted by: clarice | September 24, 2008 at 10:12 AM
soup kitchens and calamity
Okay, let's say that's hype. Let's also say that the companies that really do have their necks on the chopping block are the same companies most connected to government and politicians. Let's say their politicians are not going to let themselves and their pet companies take the hit.
You're not going to stop them and neither is TuCO.
At least W is apparently not one of them so under the circumstances it might be better to have his admin apply a fix intended to do the basic fix and do it too fast for the main schemers to escape the blade, and their bought politicians to scheme some new kind of payoff.
BTW the Paulsen plan doesn't nationalize anything. It just buys up the risky loan aggregates which evaporate as the loans are paid off or default. It might lose 100 bil, it might make a 100 bil. That's not the intent.
Posted by: boris | September 24, 2008 at 10:12 AM
I wish people wouldn't reducto ad absurdum this situation -- take over debt == nationalize everything.
As I understand it we are not talking about taking over and keeping businesses, and we are not talking about "too big to fail" but won't help the little guy. Horsehockey. Financial enterprises reach into the smallest communities and everyday business. This is... and ought to be... a temporary move to clean out the Augean Stables, and some of the sh*t that needs to be cleaned out belongs to the same Congress that wants decide where the rivers need to be directed.
Remember also, Hercules only had a day to clean out the stables.
Posted by: sbw | September 24, 2008 at 10:14 AM
Did anyone listen to Warren Buffet this morning? He said the govt is going to make money doing this. Now its only one man's opinion but when it comes to knowing how to make money investing, I dont know of anyone with a better track record evah!
Posted by: GMax | September 24, 2008 at 10:16 AM
If the idea of all this is to re-gain confidence in the markets, sorry, it's too late! Out in the heartland there is no confidence in the markets or the government. It all looks like a boondoggle/swindle to us folks who don't really understand it all. And since this proposal is coming from the same administration who sold us on the Iraq war and WMD (remember those mushroom clouds?) - well it kind of feeds the skepticism.
Posted by: jimmy | September 24, 2008 at 10:26 AM
If Treasury is going to be bidding for assets, vulture fund heroes may actually try to fly in in front of an impending $700 billion buy program and scoop up a few distressed assets on the cheap.
I've argued elsewhere that I don't see why the government actually has to end up buying anything, if this is just a liquidity-panic problem where no one wants to buy an asset because of fear of being unable to resell it. The government could just stand ready to buy at some price between the alleged 25 cent market and 75 cent true value. They just have to pick a high enough number to get the market moving again. The analogy is the gold standard, where the government promises to exchange gold for paper. As long as that promise is credible, it never (or rarely) has to actually do it.
Posted by: jimmyk | September 24, 2008 at 10:27 AM
GMax--I heard the Buffet conversation this AM on Squawk but what was interesting is that he made the assumption that a deal would get done with the legislators.
I cannot be assured that a "deal" will get done. There are just too many prima donnas holding forth.
Posted by: glasater | September 24, 2008 at 10:30 AM
Remove the uncertainty, remove the need for a bailout.
On the local NY NPR this morning, somebody, perhaps Robert Ruben, was arguing that a bailout should just guarantee assets at some determined price, not actually buy them. He asserted that this would be cheaper for taxpayers. Does this approach make sense to anybody here?
Posted by: Bill Arnold | September 24, 2008 at 10:33 AM
How high does the body count have to be before blood lust ebbs?
Bear Stearns
Fannie Mae
Freddie Mac
Merrill
AIG
All gone - and there are sure to be more.
I wouldn't mind hanging an investment banker today and I especially wouldn't mind hanging the economist who came up with the models for CDS but, as satisfying as that might be, it wouldn't do anything to allow the economy to perform better.
I would note that letting new 'concern' or 'free market' trolls to get you to toss in a 'me too' is the purpose for their existence - they are no different from and may very well be Axelrod Astroturfers.
Posted by: Rick Ballard | September 24, 2008 at 10:34 AM
A random proposal: foreclosed houses for returning veterans!
Posted by: Jim Hu | September 24, 2008 at 10:35 AM
There are just too many prima donnas holding forth.
There is also the movement being spearheaded by Newt and others advocating that the Republicans vote against the bailout to establish anti-Bush-administration credentials with no political downside. This would be a deal-breaker for Democrats. If there is a bailout, it will need to be bipartisan (including the presidential candidates).
Posted by: Bill Arnold | September 24, 2008 at 10:38 AM
My opinion?
Let them keep talking bail out for another week and finally do nothing.
I think we have passed the worst.
Psychology is stabilizing. Greed is starting to overcome fear. DOW is up slightly at today's opening.
Posted by: M. Simon | September 24, 2008 at 10:38 AM
Don't doubt that any kind of crash, big or small would have triggered no end of dimorat congress legislation to protect the little guys and blame the Bush Republicans.
The admin acted to halt the process and leave dimorats with a choice ... support the admin plan OR we make sure the roof caves on your heads first.
If so, works for me. If it all blows over with no bailout the admin gets some credit for the triage last week.
Posted by: boris | September 24, 2008 at 10:51 AM
Bear Stearns
Fannie Mae
Freddie Mac
Merrill
AIG
All gone - and there are sure to be more.
So what? Why do I care if Bear Stearns or Merrill Lynch exist or don't? Or if they get bought by somebody else or don't? And maybe Fannie and Freddie shouldn't have existed in the first place. And AIG, would the policy holders have had to immediately buy new policies from someone else? (Try to fool them into paying a year in advance next time.)
Personally, I don't read trolls, but I did read Jim DeMint's statement, and couldn't find much to disagree with. (Although what's up with the crescent moon?)
Posted by: Extraneus | September 24, 2008 at 10:54 AM
Seems to me, that for the Dutch Auction you would have to have nerves of steel.
You got that right.
Auctioned some timber property off that way one time; never again. Was a wreck by the end of the day.
If my experience is any indication the fed will be getting these assets way cheap.
Dutch auction + weak market = low price.
Posted by: Barney Frank | September 24, 2008 at 10:57 AM
M.Simon-
Let them keep talking bail out for another week and finally do nothing.
It might work for a few days but you'd get to the same point we were at on the 18th. I don't think people realize what it means when Treasuries went to ZERO that day.
Also not doing will get the government involved anyway seeing as how many of the banks left are FDIC insured institutions-UBS, WB, WM are the ones with the most wind blowing through the cracks, but their are plenty of others and they would topple over quickly. In the end the government will be on the hook for a lot more than this plan proposes and never mind the hiccups in company payrolls and store inventories as the commerical paper markets seize up.
But at least the Purity Brigade and ANSWER will have their few ounces of flesh.
Posted by: RichatUF | September 24, 2008 at 11:00 AM
"All the scary words about soup kitchens and calamity make me suspicious, especially when they're coming from the same people who were in charge all along. I'd like to know what will really happen if things are allowed to just take their course. A recession? Big deal. They occur anyway. What else? Cheap real estate? I've been thinking of buying some. What else? (And don't tell me soup kitchens.)
If companies are allowed to get so big that their dumb decisions necessitate my bailing them out, then I want a law that limits their size in the future. I wasn't planning on buying bank stocks this year, and nobody would be bailing me out if I were on the brink of bankruptcy.
Finally, an equity stake means nationalization -- government owning the means of production. There are plenty of people who would love for the government to take a major equity stake in the health-care industry, but I'm not one of them. Why would I want an equity stake in the banking industry? I think I might rather have gold."
'major equity stake in the healthcare industry'
It's sounding more and more reasonable as this mess creeps into your/my
backyard......isn't it?
Posted by: Red State of Mind | September 24, 2008 at 11:04 AM
So what?
If it stayed contained to those outfits I'd say so what too; that's why I advocated letting AIG go if they were just going to keep doing it ad hoc.
But if we let them continue to fail there is a good chance it's not just going to be giant corporations out of business because the credit marks are locked.
It's going to be your local car dealer and your local hardware store and then your neighbor and then you. When qualified people can't get a mortgage and small business can't borrow against cash flow to meet pay roll Wall Street will have gotten it in the neck and so will Main Street.
If the populists are really concerned about the rich making out like bandits let me assure them the people who will benefit from this most will be the very rich who are swimming in cash and will buy up these assets for pennies and sell them down the road for billions just as they did in the thirties. I don't have a problem with that; just the road of misery getting there.
Posted by: Barney Frank | September 24, 2008 at 11:06 AM
Palin needs some help at PBS
Vote.
Posted by: M. Simon | September 24, 2008 at 11:07 AM
their are -> there are
Posted by: RichatUF | September 24, 2008 at 11:07 AM
Extraneous,
What percentage of your retirement income are you willing to commit to "not caring"? 30%? 50%?
I don't really care which entity exists to provide the credit function but the breakdown in confidence in 1929 took twelve years and a world war to "fix". If you believe there is some sort of "safety net" which will keep you from suffering in a melt down, please describe it. If it makes any sense at all it will be a great comfort to those of us who have a historical understanding of the depth of the abyss into which we are peering.
Posted by: Rick Ballard | September 24, 2008 at 11:08 AM
From DeMints' statement;
"This plan does nothing to address the misguided government policies that created this mess and it could make matters much worse by socializing an entire sector of the U.S. economy."
Socializing the economy....nationalizing the economy....essentially, no diff.
"I wish people wouldn't reducto ad absurdum this situation -- take over debt == nationalize everything."
We need CASH......they have it......
We're all in this together....Who's gonna buy the products/services these Industries manufacture when the system goes bust?
They need it as much as we do.......
Posted by: Red State of Mind | September 24, 2008 at 11:10 AM
Well Buffett has now put his credibility on the line and is vocally advocating for the bailout. I would think that voting against Buffets recommendation with the sure panic that is quite predictable ought to make everyone standing for election figure this one out.
I say it goes through with an oversight board and the Treasury given the option but not required to take warrants. The rest of the ornaments for the Christmas tree will not make the conference committee cut.
Posted by: GMax | September 24, 2008 at 11:10 AM
Does this approach make sense to anybody here?
Bill, see my post at 10:27am.
Posted by: jimmyk | September 24, 2008 at 11:11 AM
RichardUF,
I think we are past the panic stage.
Loans will be available to the sound. The marginals will get weeded out.
Posted by: M. Simon | September 24, 2008 at 11:12 AM
GMax,
Buffet is a ghoul. He has depended on "Death Tax" fire sales to make his money.
Posted by: M. Simon | September 24, 2008 at 11:14 AM
Several Money market funds had severe outflows and at least one broke the buck ( meaning it lost value ). What has been done to alleviate panic, which may or may not be rashional?
Why not do a deal that will make the govt a profit for a change? Got knows we piss enough of it away, for once in memory we might actually have a net plus. What the hell is wrong with that?
Posted by: GMax | September 24, 2008 at 11:17 AM
past the panic stage
Not so much a panic as a structural collapse. The loan aggregates turned toxic to the market but the government is immune.
Posted by: boris | September 24, 2008 at 11:18 AM
M simon seriously with you bringing up ghoul, I thought about graveyards, and then whistling, while strolling past...
Posted by: GMax | September 24, 2008 at 11:18 AM
Anybody who thinks that Chris Dodd or Rep. (Not to be confused with our own) Barney Frank ought to be on the oversight board, say "aye!"
... Mighty quiet around here.
Posted by: sbw | September 24, 2008 at 11:19 AM
"The resistance we're seeing in Washington (to the bailout bill) is understandable but frightening at the same time. The longer this drags on and the more bickering we see, the more frightening it is," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
Another ghoul?
Posted by: GMax | September 24, 2008 at 11:23 AM
Oh. Email spam -- "Breakup & Remove Toxins"
It "concentrates on cleansing your colon while providing you with the best possible detox program."
Perhaps it's dual purpose! Clean up the economy AND comment trolls AT THE SAME TIME. Then just wipe once with a ShamWow!
Posted by: sbw | September 24, 2008 at 11:25 AM
What's to stop some mom and pop operation from starting to loan money to good risks who pay a down payment and a decent enough interest rate that mom and pop can make money on the deal and grow into a new and improved CitiGroup?
I don't know why this affects my retirement income, and I guess I don't understand enough about it to know why it would, but I'd certainly rather if it didn't. (Unfortunately, I wasn't smart enough to take Rick's buy signal last week, which could explain part of the problem.)
Wasn't the New Deal and gov't intervention part of the reason why 1929 wasn't sorted out for 12 years?
Posted by: Extraneus | September 24, 2008 at 11:25 AM
if a fair value can be established, then why do taxpayers have to buy these debts?
Because until someone does buy them, they can't be marked back to market value, and no one is willing to buy them right now because the variance is too high.
Posted by: Charlie (Colorado) | September 24, 2008 at 11:25 AM
Allow the companies to operate with the extra leverage that marking these assets to zero causes.
Insolvent companies don't have leverage.
Posted by: Charlie (Colorado) | September 24, 2008 at 11:28 AM
"the reason why 1929 wasn't sorted out for 12 years?"
Yeah, and the problem was a Republican Congress fighting it, along with Social Security.
They still are...............
Posted by: Red State of Mind | September 24, 2008 at 11:30 AM
All the scary words about soup kitchens and calamity make me suspicious, especially when they're coming from the same people who were in charge all along.
Like me?
Posted by: Charlie (Colorado) | September 24, 2008 at 11:32 AM
On the local NY NPR this morning, somebody, perhaps Robert Ruben, was arguing that a bailout should just guarantee assets at some determined price, not actually buy them. He asserted that this would be cheaper for taxpayers. Does this approach make sense to anybody here?
Explain to me how the government "guarantees assets at some determined price" without buying them.
Posted by: Charlie (Colorado) | September 24, 2008 at 11:38 AM
Not really, Charlie, but I did wonder if there was any exaggeration in your characterization of the downside.
Posted by: Extraneus | September 24, 2008 at 11:42 AM
Dunno if this helps ...
Sometimes with lotteries the payout gets larger than the price of a ticket multiplied by the odds against winning. IOW a $1 ticket has expected value greater than $1 (let's say the expected value is $1.50) but only one ticket is going to pay out the whole amount, the rest pay out zip.
If you can buy up all the tickets (100 mil) you are guaranteed to make a 50% profit. If you only can aford one ticket you are virtually guaranteed to lose your $1.
Posted by: boris | September 24, 2008 at 11:42 AM
This comment is from Viva Ron Paul so don't read it if you can't handle the truth:
"I signed into law the American Dream Downpayment initiative, which authorizes $200 million a year to assist an estimated 40,000 low-income families with downpayment funds. In this year's budget, I proposed the Zero Downpayment initiative, which would eliminate the statutory requirement of a minimum 3% downpayment for Federal Housing Administration-insured single-family mortgages for first-time homebuyers."
George Bush 9/20/04
"The Zero Downpayment Act, as its names suggests, creates a federal program that allows some homebuyers to obtain federally-insured mortgages without making a down payment. “Federally-insured” really means taxpayer-insured, as taxpayers like you foot the bill for defaults...Between the Federal Housing Administration, which is the largest insurer of mortgages in the world, and the government-created Fannie Mae and Freddie Mac corporations, the mortgage market is hopelessly distorted. Millions of mortgages in this country are federally insured, and the tax bill for defaults could be astronomical if the housing bubble bursts."
Ron Paul 6/21/04
Posted by: Viva Ron Paul | September 24, 2008 at 11:44 AM
"I don't know why this affects my retirement income"
Because your retirement income is dependent upon the income stream generated by the investments made by your pension fund. Don't look now but your pension fund probably has a nice chunk of Tranche A of Stinky Stuff MBS. Covered by some dandy CVS instruments guaranteed by Fred's Insurance & Pawn, to be on the safe side.
This piece lays out the basics of the end of the shell game pretty clearly. JPM used a "model" as a Hellfire missile to blow up banks - naughty, naughty, JPM. I would add "you should be ashamed" but I don't think sharks feel shame.
Posted by: Rick Ballard | September 24, 2008 at 11:48 AM
A random proposal: foreclosed houses for returning veterans!
In my neck of the woods, whole neighborhoods are nothing but foreclosed on homes. A real estate friend told me last night that it is like musical chairs.
A family gets foreclosed on and they have to move. Their neighbor gets foreclosed on and they have to move. Both houses are rented out while they remain on the market for a year or more. The two families switch homes and pay rent that is slightly less than what they were paying for their mortgages. The mortgage companies aren't losing a damn dime, both families are out their down payments and equity and now are renters, maybe for the first time in their adult lives. It is crazy.
Posted by: Sara (Pal2Pal) | September 24, 2008 at 11:52 AM
If I were in the senate I'd make a pre-requirement for voting on the bill that Dodd step down from his committee, and Frank from his.
But these guys don't have the cajones.
Posted by: Jane | September 24, 2008 at 11:53 AM
Not really, Charlie, but I did wonder if there was any exaggeration in your characterization of the downside.
Well, who can say? I tell it straight as I see it. Maybe I'm oversensitive to what can happen if credit locks up because of growing up in retail businesses that depended on leverage, AR loans, and "floor plan" to operate.
But that's most retail businesses; it's also what most businesses depend on for payroll, because it provides liquidity.
You tell me: how long can you hold out if your paychecks won't clear and your grocery store has no food to sell?
Posted by: Charlie (Colorado) | September 24, 2008 at 11:54 AM
Here's a little primer on Credit Default Swaps. THey were started by J P Morgan in 1995, and, since they are traded OTC it appears that no one knows much about them. They are "like" insurance, but not really.
Much speculation involved in buying and selling, mostly by institutions--this stuff is too complicated for the average Joe.
No one has said much about them as far as I can tell. Will buying up CDS be part of the bailout? If so, you may need a lot more than 700 billion!
LUN
Posted by: Verner | September 24, 2008 at 11:55 AM
No one has said much about them as far as I can tell. Will buying up CDS be part of the bailout? If so, you may need a lot more than 700 billion!
I think its more likely a lot of these would simply be voided. Companies get their premiums back, CDS holders get the gazillion dollars in liabilities off their books, and people who don't even have the assets to refund the premiums end up in bankruptcy. Maybe the fund buys CDSs for insolvent holders at their already paid premium.
Posted by: Charlie (Colorado) | September 24, 2008 at 12:00 PM
And thanks for posting that --- I started to write one last night and decided my eyes couldn't take it.
Posted by: Charlie (Colorado) | September 24, 2008 at 12:00 PM
But these guys don't have the cajones.
You'd have to get Pelosi and Reid to go along, and that would be too much like taking responsibility.
Besides, as someone or other just said, if you had everyone who'd taken FNFN money recuse themselves, they'd never make a quorum.
Posted by: Charlie (Colorado) | September 24, 2008 at 12:03 PM
American Dream Downpayment initiative
I am reasonably be opposed to this initiative and still find most Ron Paul positions toxic.
Posted by: sbw | September 24, 2008 at 12:05 PM
I think my first instinct about the relationship between Subprime and CDS is correct.
You couldn't have had the massive amounts of inferior loans without the leverage that CDS supplied. Traditional ways of hedging bets just would not have cut it. If you chart the FMFM bad loans debacle, and the rise of CDS on MDS side by side-you'd see two lines running right together.
The question now is, who is holding this stuff? Anybody know? Is it pension funds? George Soros? AIG? Is there anyone out there who can tell us?
For me, CDS is still the one big piece of the puzzle that's missing.
Posted by: Verner | September 24, 2008 at 12:07 PM
You tell me: how long can you hold out if your paychecks won't clear and your grocery store has no food to sell?
I guess I'll have to buy some pigs and chickens while I still can.
Posted by: Extraneus | September 24, 2008 at 12:09 PM
buy some pigs and chickens
Or borrow Clarice's pistolas during moose hunting season.
Posted by: sbw | September 24, 2008 at 12:16 PM
Well, I'm in a much better position to go the pigs and chicken route than most--but must we? Chicken coops and pig stys are smelly, and roosters crow at 5AM!
I'd be much more worried if I were an Obama backing investment banker type living in blue NYC.
You know all those little people democrats are suppose to champiom...
Posted by: Verner | September 24, 2008 at 12:23 PM
Hoover was President from '29 through '32. The New Deal had nothing to do with the Great Contraction which took 1/3 of the nation's money supply away. Bernanke--premier historian of the Depression--knows the danger we face.
Posted by: Patrick R. Sullivan | September 24, 2008 at 12:23 PM
What Patrick said. Bernanke has forgotten more about the Great Depression than I have ever known. He sounded pretty grave to me.
The thought did occur to me that those who are saying let those responsible reap the rewards, we are all responsible. The idiots we keep sending to Congress gave us this, but that is as much our own fault as it is anyone else.
Posted by: GMax | September 24, 2008 at 12:29 PM
You tell me: how long can you hold out if your paychecks won't clear and your grocery store has no food to sell?
I don't understand this stuff worth a crap, but the expert talking heads seem to agree that if the credit situation gets bad enough, it'll literally shut down business. They specifically cite things like payroll accounts unable to pay workers, no ability to pay suppliers (thus stopping supplies), etc. And as each bank goes, it puts even more pressure on the rest, etc. End result: depression (not recession), with all the ugliness that entails.
Don't think there's much debate that the worst likely situation is bury-the-needle bad--and those asking "how does this affect me" are reminiscent of those who shrugged as bankers jumped out of windows on Black Thursday--it could affect 'em a lot. The real question is "how likely is that?" And on that point, there appears to be little or no agreement (I suspect because nobody knows).
Posted by: Cecil Turner | September 24, 2008 at 12:31 PM
"The question now is, who is holding this stuff?"
Calpers appears to have a few dollars worth. The real answer is "every pension fund you can name".
That's why the "let it burn, we can always rebuild" attitude seems a bit strange to me.
We have met the enemy and they really is us.
I miss Al Capp.
Posted by: Rick Ballard | September 24, 2008 at 12:33 PM
But it is true that the New Deal did not get us out of the depression. WWII did. So anyone who implies that Democrats pulled us out of an ecomomic disaster generated by Republicans is simply not being historically accurate. Indeed, some argue that the New Deal kept us in a depression for longer than we should have been in one. But people got fed, so they thought Roosevelt was a hero.
Hoover made the mistake of implementing Protectionist trade practises, and raising taxes in the face of economic crisis--just what Obama wants to do. There's a parallel for you!
Posted by: Verner | September 24, 2008 at 12:34 PM
GMax:The idiots we keep sending to Congress gave us this, but that is as much our own fault as it is anyone else.
I beg to differ. My district is represented by a conservative republican. The blue state idiots who send democrats to congress are the ones to blame.
Posted by: Verner | September 24, 2008 at 12:39 PM
You tell me: how long can you hold out if your paychecks won't clear and your grocery store has no food to sell?
My Uncle, now deceased, bordered on being a John Bircher. He was so worried during the Carter years, he converted all his holdings to gold and silver. He tried to get my Mother, his sister, to do the same. He also wanted her to have at least a couple of guns in the house. He was convinced that the only way we would be able to buy anything would be with gold or silver, no paper, no credit. He encouraged massive food storage as well.
My Mother never bought into his fear, but she did allow him to store a couple of his huge bags of silver dimes at her house. Each contained $5000 in dimes. I only know about it because she was worried that she hid them so well that if she died, no one would know where the money was, so she showed me the hiding place. Any idea how heavy a $5000 bag of dimes is?
Posted by: Sara (Pal2Pal) | September 24, 2008 at 12:39 PM
Verner
The clean hands crew seems to be a pretty small bunch. Now I blame the Democrats a lot more, but there is plenty of blame to go around here.
Subprime lending should have been shut down at the FHLMC and FNMA level in 2001 or 2002. We clearly knew by 2005 there was a problem, lots of squawking by then.
But just cuz you like you idiot, does not make him any less an idiot. What did he do to alert you to the problem?
Posted by: GMax | September 24, 2008 at 12:46 PM
Rick, do you think all pension funds, or more specifically pension funds run by democrats like organized labor etc.
Wouldn't that be the circle complete! Democrat run Fannie Mae produces the bad loans under the pretext that it gives housing to "Poor people", democrat financial wizards (and look at where the money from WallStreet REALLY goes!) come up with CDS to cover their tracks and keep the books looking goood--and democrat (ie organized labor, municipalities etc.) run pension funds buy up the CDS.
Posted by: Verner | September 24, 2008 at 12:52 PM
I think my first instinct about the relationship between Subprime and CDS is correct.
Well, mostly. The root cause, I think, was the decision that FMFM ought to encourage, and buy, less than desirable mortgages for social reasons. At more or less the same time, Sarbanes-Oxeley introduced a pretty onerous version of mark to market, that will turn out to have unexpected consequences later.
Securitized mortgages were a response, in part, to the introduction of government pressure to issue mortgages to less creditworthy people: they reduced risk (hard as it seems to believe today) by letting you trade something bigger than a single mortgage contract.
Credit default swaps were then an attempt to reduce risk even more by hedging the risk on the securities.
The Bloomberg article Rick linked explained some things I wasn't seeing; the way the CDSs are structured, there are a whole bunch of "credit events" other than out and out default that can cause the CDS to be invoked, like a change in the credit rating of the company involved.
So it went something like this:
- someone wanted to get rid of some MBSs, and sold at a firesale price.
- the accountants and SOX made everyone else mark their MBSs down too.
- some more people wanted to get out too, because their MBSs were dropping
- until something happened, like a credit rating being lowered, because of the drop in value
- at which point, the CDSs "fired". The people who had been paying premiums told the people doing the CDSs that they wanted to exercise their rights: give us our $5 billion for this big MBS, and we'll give you the MBS.
- if that only happened once or twice, then it's just the usual operation of the market; the other company would sell the actual MBS, have a little loss, life goes on
-but-
- in this market, when people are worried about MBSs anyway, that causes the price to fall badly: people don't really want to buy MBSs
- but as soon as the price falls, they have to mark-to-market
- which causes more people to try to get out
- which causes more "credit events", causing more CDSs to fire
- leaving companies like AIG Holding with big cash demands, against which they have illiquid MBSs with dropping values
- which leaves them insolvent.
Then, with a couple of big investment banks and holding companies looking insolvent, and more and more exposure to the "falling knives", companies like Morgan Stanley start looking for cash-rich partners or buyouts so they'll have someone with the reserves to pay off the CDSs
- word gets around
- credit rating agencies start looking at the balance sheets
- which causes more credit events
- which causes more CDSs to fire
So it's not just dominoes falling, it's a situation in which one domino may cause several to fall next: it accelerates.
- MBSs become more illiquid, no one knows which bank may have an exposure they haven't mentioned yet
- so people stop loaning money to other financial firms
- which means they can't clear their CDSs; they're holding illiquid MBSs and can't even get cash against their current value
and pretty quick, no one with cash thinks anyone who wants to borrow cash is a good risk, while because of the uncertain structure of the MBSs, no one can tell what the value should really be.
Posted by: Charlie (Colorado) | September 24, 2008 at 12:57 PM
those asking "how does this affect me" are reminiscent of those who shrugged as bankers jumped out of windows on Black Thursday....
Yes. And the ones who are saying "so let it" are trying to argue that instead of a Great Depression, what we'll get is a good Depression.
Posted by: Charlie (Colorado) | September 24, 2008 at 12:59 PM
How high does the body count have to be before blood lust ebbs?
Ya know. I have some sympathy here. But realize one thing. My family was farming through the 80's. There were auctioneering companies in 83-86 timeframe that would have 100 sales from January through March. The auctioneers made millions. You could literally pick any day of the week and go to at least one sale within a 50 mile drive for months. It would slow down over the summer then fire up again after harvest. This went on for over 3 years. You'll have to pardon me if I don't have a lot of sympathy for these guys on Wall Street. Yeah, I know it's serious, I know their may be grave repercussions, but ,DAMMIT, NONE of the big name lenders gave two shits when hundreds of thousands of Farmers they held notes on went under. The whole subject is a little raw.
Posted by: Pofarmer | September 24, 2008 at 01:01 PM
Look back GMax, we were being warned.
I think the problem was, with all the democrat party generated chaos--from the two faced opposition to the war on terror/Iraq, the energy crisis etc., there was too much static to hear it plain and clear.
And I also think the gravity of the situation we now find ourselves in has been a surprise to many of our greatest financial minds. They knew it had the potential of being bad, but not quite this bad.
Warren Buffet now seems like the lone prophet in the dessert.
Bottom line. If they had passed reform measures limiting FMFM's portfolios in 2005, and passed legislation providing for clarity in the derivitives markets etc., we would not be where we are today. Now--who was pushing for all that, and who was blocking it.
Posted by: Verner | September 24, 2008 at 01:05 PM
Charlie. Heh!
Posted by: sbw | September 24, 2008 at 01:10 PM
Dont get me wrong, as I said I blame Democrats more than Republicans. But we did hold both houses up until 2006 along with the WH. So exactly how much squawking was done? Not enough regardless, because the end result was nothing got done.
What did your favorite idiot do specifically to warn you?
Posted by: GMax | September 24, 2008 at 01:15 PM
I think the biggest problem with the public getting a handle on all this is that we've heard all these "the sky is falling" cries before. We heard it in the '70s, the '80s, and again in the '90s.
Things for most of us post WWII adults were the worst during the Carter years and that seems to be the comparison point for many.
So here is my question for all you financial gurus:
If someone lives on say military retirement plus Social Security, owns their car outright, has no balances on credit cards and rents rather than owns, what can they expect? How bad will it be for them?
I ask because I know several people who fit that description and they don't know whether they should be frightened to death or not.
Posted by: Sara (Pal2Pal) | September 24, 2008 at 01:22 PM
"You'll have to pardon me if I don't have a lot of sympathy for these guys on Wall Street."
"Not a lot" diminished to "less than none at all" is where I'm at but I have this aversion to cutting off my nose to spite my face.
"do you think all pension funds, or more specifically pension funds run by democrats like organized labor etc."
Verner,
Purty near all of them. Our fantastically sophisticated Credit Rating Agencies (S&P, Moody, Fitch) used tremendously powerful models which determined to a level of certainty approaching 99.9999998% that, with the proper CDS attachhed, these things were safe as
housessomething really safe.A typical MBS is still a very good instrument for a pension fund to hold to payout. Scrub out the "social engineering" aspect and the deals will tick along like clocks - there really is enough history involved to determine 'natural' default rates, even to include deep recessions. I was amazed by the low default rate on the Countrywide stuff.
Posted by: Rick Ballard | September 24, 2008 at 01:22 PM
Just announced--President Bush will address the country this evening regarding the financial crisis.
Perhaps he should have Warren Buffet at his side.
Posted by: glasater | September 24, 2008 at 01:23 PM
"If someone lives on say military retirement plus Social Security, owns their car outright, has no balances on credit cards and rents rather than owns, what can they expect?"
To live long and prosper. Inflation is the only enemy to those people and COLA adjustments handle that problem.
Posted by: Rick Ballard | September 24, 2008 at 01:28 PM
News from the front, especially for those who think the panic is over:
The strained credit markets on Wednesday kept investors scrambling for Treasury bills, nervous about potential obstacles to the passage of the bank bailout plan.
Investors were also jittery ahead of a massive Treasury auction of $34 billion in 2-year notes; if demand from foreign investors is poor, it will indicate that the world is shying away from dollar assets in the wake of the U.S. currency's recent slump against other major currencies.
Aint nothing over.
Posted by: GMax | September 24, 2008 at 01:29 PM
....My family was farming through the 80's. There were auctioneering companies in 83-86 timeframe.....
I hear you loud and clear Pofarmer and remember those days--unfortunately--all too well.
The only thing that saved our bacon was the SBA was offering three per cent money and we slogged through a ton of paperwork--on our own--to get it.
That and the fact that a gas company wanted to build a pipeline through our property got us through those tough times. Otherwise our business would have been toast.
Posted by: glasater | September 24, 2008 at 01:30 PM
GMax, in all seriousness, what was she suppose to do? E-mail everybody in the district and tell them to cash out thier 401ks, convert the cash into gold bricks, and hide it under a matress?
And it is true that I am no fan of what Republicans did when they were in power. They got fat and happy, and did not choose their battles. Democrats had one thing they did not--party discipline. Pelosi and Reid may be idiots, but at least they have the advantage of 100% participation in anything they decide to do.
And I don't have to tell you that minorities can still be powerful in blocking things they don't like.
So blame republicans if you like, but if you continue along that line, and give an inch to those neo-socialist blackhearts--they are going to have the WH, and both houses of congress, and will do with our great nation what ever the hell they want. You think it's bad now? Just wait.
Posted by: Verner | September 24, 2008 at 01:30 PM
WALL STREET's RECKONING!
(Yet, it Took 10 Years to Raise MinWage $1.00)
http://www.youtube.com/watch?v=S27yitK32ds
"Rule one: Rush the decision. Time the game to fall in the week before Congress is set to adjourn and just 6 weeks before an historic election so your opponents will be preoccupied, pressured, distracted, and in a hurry.
Rule two: Disarm the public through fear. Warn that the entire global financial system will collapse and the world will fall into another Great Depression. Control the media enough to ensure that the public will not notice this. Bailout will indebt them for generations, taking from them trillions of dollars they earned and deserve to keep.
Rule three: Control the playing field and set the rules. Hide from the public and most of the Congress just who is arranging this deal. Communicate with the public through leaks to media insiders. Limit any open congressional hearings. Communicate with Congress via private teleconferencing calls. Heighten political anxiety by contacting each political party separately. Treat Members of Congress condescendingly, telling them that the matter is so complex that they must rely on those few insiders who really do know what's going on!"
(FYI: Republicans have blocked voting on bills by Dems for more oversight and regulation.)
Posted by: Angellight | September 24, 2008 at 01:34 PM
Bush to address nation?
Stupidest. Thing. Ever.
Haven't they told this assclown most people hate him?
Posted by: Viva Ron Paul | September 24, 2008 at 01:35 PM
You mistake me for naive fool. I can assured I am not willingly one.
Democrats will screw this country up every chance they get. I just kinda expect them not to get Republican help.
But if there are any heros here ( heros to me are NYC firemen who went into a burning highrise building to help others without regard for themselves ) I aint seeing them.
I will grant that in 2005 they did try to do something about FNMA and FHLMC. They should have done more. Thus my anger smolders.
A throw all the bums out and start over would not trouble me in the least. It might make for less grandstanding on this bill too...
Posted by: GMax | September 24, 2008 at 01:38 PM
but I have this aversion to cutting off my nose to spite my face.
That's where I'm at too, but it don't make the shit sandwich any more palatable.
Posted by: Pofarmer | September 24, 2008 at 01:41 PM
If someone lives on say military retirement plus Social Security, owns their car outright, has no balances on credit cards and rents rather than owns, what can they expect? How bad will it be for them?
Look, as I think I've said before, I expect that after the bitching and moaning and posturing gets done, this plan or something enough like as to make no difference will pass. And so, just as in the 70's, 80's, and 90's, we'll muddle through, giving even more evidence to the people who say "oh, it wasn't that bad, was it?"
If the Bad Thing did happen, well, it was the pensioners in Argentina who found themselves recycling scrounged cardboard and aluminum to get money to eat.
Posted by: Charlie (Colorado) | September 24, 2008 at 01:42 PM
Angellight is no angel and offers no light.
Look into the mirror, Horatio. It is not in our stars, but in ourselves that we are underlings.
Offer more light, Angel, or soon you will disappear into Troll-land.
Posted by: sbw | September 24, 2008 at 01:43 PM