Andrew Malcolm is shocked and awed by the firm empirical background to the $700 billion figure upon which the Treasury rescue package is based:
You know where that very important $700-billion figure came from?
Here's a quote from that Forbes story:
"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."
They made it up to be sufficiently ginormous to frighten everyone into rapid action.
Please. Here at JOM we were miles ahead of that. This was from Friday Sept 19 as rumors of the Treasury plan swept the markets:
Shock And Awe
A thought on the Treasury plan to create a multi-billion dollar entity to buy mystery paper - if the rumored size is $200 to $500 billion, the actual size will be $600 billion. There is no way Washington re-enacts the "too few troops" debate in the financial arena - this plan has to be too big to fail.
OK, I missed by $100 billion, but I pegged the analysis and methodology.
But enough nostalgia! I blame Paulson for the delays and scuffling over the current bill. If he had presented a simple plan with credible oversight, Congress might not have felt obliged to don their thinking caps. Instead he presented a plan that clearly needed development.
Congress ended up with a better oversight mechanism (good!), an arcane provision on equity warrants that will inhibit firms from participating in the Great Dump and Clean-up, cosmetic caps on executive compensation that will similarly discourage participation, and a promise/threat to tax Wall Street five years from now to recoup government losses, thereby scaring away private investors until five years have passed and the nature of the tax is clear.
What did Congress achieve? Instead of an already scary announcement that "I'm from the government and I'm here to help" this plan says "I'm from the government and I don't know if this will work but I don't want to lose any money of it doesn't." Yeah, that'll restore confidence. Oh, well - that 12% approval rating didn't just fall out of the sky and land on Congress - they earned it.
MORE: Why is discouraging healthy firms from participating in the bail-out a problem, as Paulson said? Well, if participating firms are perceived as weak, and thereby stigmatized, both healthy and marginal firms will tend to stay away. On the one hand, this reduces participation in the Treasury reverse-auctions, thereby undermining the price-discovery objective. More importantly, marginal firms will avoid the stigmatization of participating and instead will stick with their current Plan A - cling bitterly to their bum assets, cut back on lending, and strain to raise cash and improve their liquidity. That does not exactly smell like a solution to the liquidity crunch the plan is meant to address.
The most desperate firms will participate and become somewhat healthier as a result, but unless they improve from desperate all the way to robust (unlikely), they will still be scuffling to raise cash, improve liquidity, and stave off disaster. Again, this is not helpful to the broad objective.
With broad participation healthy firms might get back t orobust and marginal firms might make it back to healthy, all withiut adverse publicity. That could lead to much greater liquidity in the credit markets. Unfortunatley, it mgith also mean that somewhere a financial services firm which sold assets to the Treasury will report big profits and big bonuses, and that will never do. Better an ineffective plan and a ghastly financial meltdown.
John McCain needs to start naming names.
Posted by: Steven W. | September 29, 2008 at 01:23 PM
sometimes you need to throw out a ginormous number to shock and awe the markets. It's basically the nuclear option. Whether it will actually be that much, or even more, is the question.
Speaking witha friend in commercial RE development, he is just as concerned about that sector should the markets melt. So the fed is probably wise in the basics. Not a lot of people know the Street better than Paulson.
By the way, why are the Democrats so fixated on a tax? I don't think too many of these firms are going to be making a profit anytime soon, so what's the point except to score political points?
Posted by: matt | September 29, 2008 at 01:28 PM
The trouble with the Troubled Asset Relief Fund TARF) -- why not call it the Crappy Asset Relief Fund (CARP) -- is that it is more of the same strategy that has failed to allow price discovery, risk adjustment and relief to the credit markets. The banks are going to the Fed with all kinds of crummy collateral rather than borrow at LIBOR, which is high becuase the banks don't want to lend to each other. I'm not so sure the problem with mortage price discovery is lack of willing buyers, Citi just snarfed up WB, but unwilling sellers. However, Paulson and Bernanke have a lot more information than we have, so perhaps they are correct.
The other question I have is how come no one is talking about lowering corporate tax rates? Lower taxes reduce risk of investing capital.
Posted by: LindaK | September 29, 2008 at 01:36 PM
Bailout Bill fails in House!
Posted by: Barbula | September 29, 2008 at 01:46 PM
Right now it's losing in the House.
Right now the Dow is down by 500.
Posted by: Charlie (Colorado) | September 29, 2008 at 01:47 PM
Make that nearly 700.
Posted by: Charlie (Colorado) | September 29, 2008 at 01:50 PM
They say Pelosi gave a speech that was so partisan that some incensed Republicans begged off.
Posted by: hrtshpdbox | September 29, 2008 at 01:50 PM
Fox just said that House Republicans went "bezerk" when they heard Pelosi's partisan speech, and they may be happy to hang her with this failure.
I don't want it to fail, but Nancy "Unpatriotic" Pelosi is truly the Stupidest Politician in the World ™
Posted by: MayBee | September 29, 2008 at 01:50 PM
Did Pelosi make another "unpatriotic" charge today?
Posted by: DebinNC | September 29, 2008 at 01:54 PM
Cutting off the nose to spite the botoxed face?
Posted by: michaelt | September 29, 2008 at 01:54 PM
If the Reps play this right they can win all three branches of govt..of course that would require gagging mcCain for 5 weeks.
Posted by: clarice | September 29, 2008 at 01:56 PM
Fox just said that House Republicans went "bezerk" when they heard Pelosi's partisan speech, and they may be happy to hang her with this failure.
Except that CNBC is reporting it's the Repuiblicans's fault.
Posted by: Charlie (Colorado) | September 29, 2008 at 01:57 PM
That's a pretty big Democrat no vote too. Glad it didn't pass. Bad, bad bill. Now let's get down to business and do this right. Pelosi is just a political animal with very little brain power.
Posted by: bio mom | September 29, 2008 at 01:58 PM
And the stockmarket is like a spoiled teenager that throws a temper tantrum when it doesn't get its way. Good parents don't give in to teenager blackmail attempts.
Posted by: bio mom | September 29, 2008 at 01:59 PM
Rush:"They're Browbeating 11 House members to get them to change the3ir votes."
Posted by: clarice | September 29, 2008 at 01:59 PM
I want it to pass. I really really do. My way of handling this so far is to just not go online and look at how our 402(k) is doing.
Yes, they are going to blame Republicans for this. But Pelosi is an idiot, and she is 3rd in line for the Presidency.
Posted by: MayBee | September 29, 2008 at 02:03 PM
"Cutting off the nose to spite the botoxed face?"
Believe me,the nose is better off out of there!
Posted by: PeterUK | September 29, 2008 at 02:20 PM
how you fix a problem must relate to how the problem came to be. if only to the extent that it must be generally understood.
if Mac's team has any sense at all, they need to push that idea to the forefront, force a debate on the democrat fannie/freddie scandal, demand a repeal of the CRA, then sell the fix as necessary medecine.
with all due respect to charlie and others - many of us are being guilted into going along with fixes when the responsible parties are not properly held to account.
Posted by: ex-democrat | September 29, 2008 at 02:22 PM
oops: ** .. are tired of being guilted .. **
Posted by: ex-democrat | September 29, 2008 at 02:25 PM
how you fix a problem must relate to how the problem came to be.
If you bleed to death, treating your burns won't help.
Posted by: Charlie (Colorado) | September 29, 2008 at 02:29 PM
with all due respect to charlie and others - many of us are being guilted into going along with fixes when the responsible parties are not properly held to account.
Let's be real clear here: I'm not guilting anyone. I'm telling you that you're an idiot not to go along with it, and predicting that you are really really not going to like the outcome if this, or something like it, doesn't pass.
Really really not going to like.
If you feel guilty about being an idiot, that's your issue.
Posted by: Charlie (Colorado) | September 29, 2008 at 02:31 PM
401(k) obviously.
402(k) is wishful thinking. I'm lucky if it's a 104(k) at this moment. :-)
Posted by: MayBee | September 29, 2008 at 02:34 PM
"I'm telling you that you're an idiot not to go along with it.."
i normally get that kind of response from lefty trolls. congratulations.
Posted by: ex-democrat | September 29, 2008 at 02:41 PM
Ex-Dem, how long have you known me? When do you recall my language being intemperate and out of proportion to my actual feelings?
Posted by: Charlie (Colorado) | September 29, 2008 at 02:42 PM
charlie - was it me who accused you of being an "idiot" because we disagree?
Posted by: ex-democrat | September 29, 2008 at 03:06 PM
I want the credit crunch fixed, but I don't accept the inevitability of giving the dems the white house and a supermajority as well.
Posted by: ex-democrat | September 29, 2008 at 03:10 PM
Enlightened: Didn't you wonder why the Senate wasn't going to vote until after sundown on Wednesday? Rosh Hashanah is a high holiday for those of Jewish faith. Congress is always dark for this holiday and Pelosi knew it as did everyone else.
Posted by: Sara (Pal2Pal) | September 29, 2008 at 05:47 PM
Guys, there is absolutely no way, zero, nada, that ACORN will get put back in. They'd lose all the Repubs and even more Dems. It is silly to even speculate on that. The deal will be modified from where it is now, probably change the name and keep the guts pretty much the same. This whole debacle is due to a failure to communicate and bad PR.
Posted by: Sara (Pal2Pal) | September 29, 2008 at 05:51 PM
Watch how fast those constituents do an about face if the stock market falls another 500-700 pts tomorrow. Congress will be falling all over themselves to have a new vote.
Posted by: Sara (Pal2Pal) | September 29, 2008 at 05:58 PM
You can say what you want but it was a spectacularly bad bill. And those of you predicting dire consequences need to be reminded that nobody knows how this will play out.
Posted by: whosonfirst | September 29, 2008 at 07:12 PM
...nobody knows how this will play out....
So true!! I've let my mind reading/fortune telling skills lapse.
Posted by: glasater | September 29, 2008 at 07:50 PM
Sara and Charlie,
I believe we all agree this debacle requires federal action. But any response will be ineffective absent action against root causes and the public's understanding of root causes. While the CRA, Fannie, Freddie, Barney, CDodd, is widely discussed on the Right internets and by Rush, it has barely percolated with the muddle on the MSM. The dem's can roll on with the lies already out there, which have largely unchallenged by Bush or McCain. McCain could have won this election right there if he had let loose with this history at the first debate, 0bambi gave the opening more than twice.
Posted by: StrawmanCometh | September 29, 2008 at 09:22 PM
Ever notice that ghasty financial meltdowns are always the result of misguided government actions?
But we're from the government and we're going to demonstrate how a business should be run?
End laughter.
Posted by: Thomas Jackson | September 29, 2008 at 11:54 PM