Mother of All Bailouts

I am economically illiterate (maybe I should run for President ha ha) but Gleen Greenwald has an interesting take.

‘Leave aside for the moment whether this gargantuan nationalization/bailout scheme is “necessary” in some utilitarian sense. One doesn’t have to be an economics expert in order for several facts to be crystal clear:

First, the fact that Democrats are on board with this scheme means absolutely nothing. When it comes to things the Bush administration wants, Congressional Democrats don’t say “no” to anything. They say “yes” to everything. That’s what they’re for. …

Second, whatever else is true, the events of the last week are the most momentous events of the Bush era in terms of defining what kind of country we are and how we function…. Again, regardless of whether this nationalization/bailout scheme is “necessary” or makes utilitarian sense, it is a crime of the highest order — not a “crime” in the legal sense but in a more meaningful sense…What is more intrinsically corrupt than allowing people to engage in high-reward/no-risk capitalism — where they reap tens of millions of dollars and more every year while their reckless gambles are paying off only to then have the Government shift their losses to the citizenry at large once their schemes collapse? We’ve retroactively created a win-only system where the wealthiest corporations and their shareholders are free to gamble for as long as they win and then force others who have no upside to pay for their losses….
More amazingly, they’re free to walk away without having to disgorge their gains; at worst, they’re just “forced” to walk away without any further stake in the gamble. How can these bailouts not at least be categorically conditioned on the disgorgement of ill-gotten gains from those who are responsible?

Third, what’s probably most amazing of all is the contrast between how gargantuan all of this is and the complete absence of debate or disagreement over what’s taking place….Can anyone point to any discussion of what the implications are for having the Federal Government seize control of the largest and most powerful insurance company in the country, as well as virtually the entire mortgage industry and other key swaths of financial services? Haven’t we heard all these years that national health care was an extremely risky and dangerous undertaking because of what happens when the Federal Government gets too involved in an industry? What happened in the last month dwarfs all of that by many magnitudes…

Other countries are debating it. The headline in the largest Brazilian newspaper this week was: “Capitalist Socialism??” and articles all week have questioned — with alarm — whether what the U.S. Government did has just radically and permanently altered the world economic system and ushered in some perverse form of “socialism” where industries are nationalized and massive debt imposed on workers in order to protect the wealthiest. …

But there’s virtually no discussion of that in America’s dominant media outlets.’

I apologise for the long post, and of another person’s stuff at that. But if Greenwald is right, this is one of the most important changes in the nature of American capitalism since WW2, perhaps since the ‘thirties, so maybe prolonged discussion would be wise.

But yes, it would be interesting to see what trained economists think about all this.

There is something so touchingly naïve, and quaint, about your suggestion that it makes me reflect fondly upon times gone by. It is sorta like those days where those marketing schemes where professional baseball players all show up in 1920 uniforms to play the day’s game, and beer is sold at the price it went for in 1928. At least the first beer, anyway.

Look, the legislative train has ‘left the station’, I regret to say.

Dsquared reported at Unfogged that he’s so swamped by the effects of this stuff on his day job that he doesn’t have time to come up with an overview. He also said at another time that there could be ethical problems with his giving free advice to the general public, by which I think he meant that he could be regarded as planting stories for a client’s benefit, or could end up being responsible for a friend’s bad investment move done on his advice.

All paraphrase subject to correction by the man himself.

The whole thing is unspeakably horrible. To begin with, it’s a reaffirmation of the principle that if something’s really important, Congress and the courts should not have anything to do with it. It even seems that Bush doesn’t know which way to jump; my guess is that Cheney is the only elected official still in the game.

Other creditors holding bad debt unrelated to housing are lining up at the trough. A group of lobbyists has delivered the bankrupt beggars’ ultimatum: they’re only willing to accept the $700 billion if no strings are attached. With such a strong negotiating position, they’d be foolish not to play hardball, of course.

Phil Gramm represents the largest foreign bank with problems here — as the director of UBS Investment Bank’s U.S. operations, he may even be responsible for the bank’s risky American exposure. Might Gramm possibly be responsible for the decision also to allow foreign banks access to the slush fund? Ya think?

I’v been saying for awhile that the first proposal must have been a feint, pushing the envelope to make the real proposal look not so bad.

Even a lot of Republicans in Congress (including the slimy Sen. Coleman of MN) have rejected the first proposal. Now they’ll be able to say “This is a non-partisan issue, and we joined with the Democrats to reject Bush’s first proposal. But the partisan Democrats are not satisfied with that; they want even more.”

If the Democrats don’t take the initiative, they’ll end up quibbling weakly about whatever Bush proposed next, and finally substantially accepting it.

This could be an opportunity for Obama to exercise leadership by talking to Democratic leaders in Congress. Is he doing that? It’s sort of a litmus test as to whetehr he’ll be worth anything as President. It shouldn’t be hard for him to zing McCain, but to actually take command of the issue will be a lot harder.

What’s striking is how the thing has metastasized even over the weekend. From a buyback of residential mortgage-backed securities at some sort of fair value, it’s now proposed to give Paulson $700 billion to spend on any sort of financial asset he pleases, paying big fees to his mates (the ones being rescued) for managing the sale of their own toxic waste, and with absolute freedom from any oversight. And when the $700 billion runs out ….?

I also think that the Czar (Paulsen, presumably) should be watched every minute of every day for the rest of his life. All of his official communications should be monitored, but his off-duty activities and associations should be watched. He should be forbidden forever to take jobs with any of the companies involved, or to take gifts of any size from anyone (including million dollar speaking fees.)

Even if the proposal is revised, he’ll have great discretion ver an enormous kitty.

And as I’ve said, if I were a lobbyist, I’d put his gardener, his babysitter, the waitresses where he has lunch, and everyone else who ever sees him informally on retainer immediately.

There’s no way that this should be put under the discretion of the Secretary of the Treasury. They should set up a new agency to do it, plus manage Fannie and Freddie.

Here’s the amazing thing. How much is the market capitalization of the whole banking sector? Bank of America and JP Morgan Chase are right around 170 billion each. Wells Fargo and Citigroup are around 120 billion each. Goldman Sachs, Merrill Lynch, and Morgan Stanley are 50, 45, and 30 billion. That adds up to 705 billion dollars. We could buy the whole banking sector for not much more than what we’re talking about spending on this bailout.

Walt: even if you are missing some pieces ( foreign and local banks, I guess), your calculation is still scary…

What is bugging me about this plan is that it is presented as a ‘fast action, made up in the last week’ plan, while they must have been making worst-case plans for at least a year. Most of the ‘toxic waste’ here has been toxic for a long time, and the only difference is that the private sector has officially given up hope of untoxifiing it themselves.

So, congress is encouraged to act fast and bipartisan as if there is a sudden crisis, and to ignore small wrinkles in the rush of the moment, while the financials must have already a very good idea how this will work out.

Joseph, we’ve all been waiting for a long time for the Democrats to stop being Charlie Brown to the Republicans’ Lucy. That makes us meta-Charley-Browns, because they almost always disappoint us. But if they show some backbone for once, we’ll all be delighted.

And of course, The American Left are meta-meta-Charley Browns, because they keep hoping for Democratic voters to quit hoping for the Democratic pros to do the right thing.

Is there a meta-meta-meta? I can’t think of one right off.

Sorry, I was replying to post #17

Hey, what’s that sound? Is Grover in the bathroom trying to drown another critter? Dang it. Every time we git comfy on the Bark-a-lounger watching lipstick ads, that kid gits up to no good. I jus don’t know WOT to do….

My understanding of the details of this new entity comes from this article, which suggests that based on current markdowns these loans might well be sold for as little as 10% of face value for the most toxic assets.

While this doesn’t necessarily make this action a good idea, at least it isn’t as stupid as some people are trying to paint it (i.e. there seem to be a lot of people convinced that the fund created will be paying 100% face value for the assets).

The superficial resemblance to the shock doctrine idea is striking. But the terms of the bailout don’t resemble a political wish list: they’re either (in the most charitable case) a desperate attempt to preserve the status quo or (in the worst case) a gigantic looting operation.

Stuart, sure, but there are already serious players out there with long-term targets, billions in cash and the willingness to buy sludge , if the price is low enough. In all likeliness, Treasury is going to pay more, or the banks would have sold out long ago.

Are there already talking points on how all this is lybral mofo’s fault? What is Larry Kudlow saying these days?

OGMB: My impression is that all debt will be bought via reverse auction. So each time the Treasury buys more “distressed assets”, it will run another auction. Presumably the worst debt will sell in the first auctions for the cheapest, and later auctions will buy slightly better debt for slightly higher prices, etc.

Note that there’s nothing in the draft bill the constrains the Treasury Secretary to do it that way.

Ah, that’s right, I saw Andrew Sullivan on Bill Maher’s show yesterday, and he was pushing this line that all those people who took all those mortgages were terribly irresponsible. It felt awkward listening to this idiot.

Re: Obama’s leadership…

That Obama surrounded himself with the Clinton economic team last week may have indicated his “seriousness” to the inside-the-beltway crowd, but it reinforces my sense that we cannot expect too much from him now or in the future on these issues. Clinton’s–now Obama’s– economic team helped midwife the current disaster in the 1990s. They’re more pragmatic than the kleptocratic ideologues who run the Bush administration, but their basic economic impulses work against their formulating a real solution to this mess. And, as David Sirota pointed out over the weekend, not a single labor-affiliated economist was invited to Obama’s emergency meeting last week.

Now that AIG’s boss says ‘No. Thank you.’ to USD 22 million, is this the 21st century equivalent of Ayn Rand’s D’Anconia blowing up his copper mines? Maybe this is what Greenspan planned all along!

Seriously, schadenfreude has never been so very sweet. Ever! Not to me. Not to anyone; again, ever. Now, how do I make money out of all this mess? What was that line in Schindler’s List? “Luck? No. War!”

First, and most importantly, we must all spread the Paulson plan’s real name (stolen from Yglesias commenter):

I CAN HAZ $700 BILLIONZ KTHXBAI ACT.

Second: seriously… there have to be many, many more ways to inject liquidity in the markets than buying off Wall Street. Will the Dems hold up? Who knows. Was very encouraged to hear (at Obama National Security Town Hall Meeting here in TC) Reps. Ellen Tauscher and Betty McCollum say, “There will be no deal for Wall Street without a deal for Main Street.”

Third… but you know: what everyone else says, in their pessimism: “But you know they’re going to cave…”

Bernie Sander’s conditions are much better than Reich’s.

a) Impose a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. That would raise more than $300 billion in revenue;

I really see no reason to stop at 10%. 60, 70% would be fine.

Actually, confiscation and crucifixion are pleasant alternatives that come to mind….

Anyone here that actually lost money? Or, for that matter, made some, like that NY hedge fund bloke? Else, this whole thread is moot.

Doesn’t the US government now own 79.9% of AIG? That would seem to be a precedent for government holding massive amounts of stock.

Blah with no hope.

The alternative is worse.

Democrats want to make sure other dead beats get protected, the rich as a whole get punished, and another regulatory body gets created.

That won’t sell.

Bush will win.

KISS. No blank check. Transperancy. Equity ownership. Consensus decisions.

With AIG, the gov gave them a loan and declared their equity the collateral. That’s fine. That’s not “equity stakes” if I understand correctly what Sanders and Reich are talking about. They want to share the future profits. Has this been done? How can it be done? I don’t think I like the idea.

Just curious – could Paulson give all the money to the RNC? Or to himself and his closest friends? After all, no review by anyone, no lawsuits… would it actually be illegal for him to just give it to himself?

With AIG, the gov gave them a loan and declared their equity the collateral. That’s fine.

But that is totally consistent with what Sanders, Reich, Dean Baker, etc. are proposing — it’s a general principle they’re talking about, not a specific mechanism.

And that principle is just that the federal government get a claim of some kind on the insitutions themselves, and not simply buy particular assets. This is partly to give taxpayers a stake in the upside, but at least as importantly it ensures that existing equity owners (and, ideally, debt owners) are not held harmless.

Sanders says:

Require that taxpayers receive equity stakes in the bailed-out companies so that the assumption of risk is rewarded when companies’ stock goes up.

That’s not a collateral, that’s owning and selling companies’ stock.

The reward for risk is a secondary argument. The primary argument is governance. There is enough liquidity available worldwide to buy those corpses at the right price, except nobody wants to touch them right now because nobody can cut them open to see inside how rotten they already are. And nothing in the Paulson plan alleviates this fundamental lack of trust.

abb1: That’s not right. The federal government receives 80% equity no matter what happens. (I haven’t seen the precise terms stated, but everybody is assuming they got warrants rather than stock outright.)

Markup: I don’t really disagree with that. I’m commenting more on the fact that in the details it doesn’t fit Naomi Klein’s Shock Doctrine idea as much as it looks like at first glance.

Are they going to hire Jim Cramer or something?

Will welfare supply the final bullet and a hammer and punch?

as it looks like at first glance.”

3 glances and you’re out! :)

I think we need a Rumsfeld poem on this to help sooth the soul, thus

Clarity
I think what you’ll find,
I think what you’ll find is,
Whatever it is we do substantively,
There will be near-perfect clarity
As to what it is.

And it will be known,
And it will be known to the Congress,
And it will be known to you,
Probably before we decide it,
But it will be known.

—Feb. 28, 2003,

In the Chrysler bailout, they sold the warrants back to Chrysler for what they were worth.

Whatever the proposal, we should leave the equity and bond holders largely on the hook as much as possible. We are only setting ourselves up for more problems if we let people get the impression that they can’t lose. Now I’m not a financial expert so I’m willing to accept that it may not be possible to leave them entirely on the hook without also triggering a meltdown.

Fine. But I want to hear a darn good explanation of why they shouldn’t be on the hook, first.

Is that really too much to ask?

And to assign some feds to oversee their boards of directors, of course, to make sure there is no looting.

I’m not sure if this means we should put someone on the board, or if we should create an authority that monitors the board. In the first case, how is that supposed to work without equity, and in the second case, how is that superior to having someone on the board?

Isn’t the underlying problem bad mortgages, made by people taking bad personal risks?

Matt Yglesias points out that the problem is not bad mortgages existing but rather the uses to which the bad mortgages are put within the banking system for leveraging. This sounds pretty right to me although I’m not the most financially sophisticated knife in the drawer.

Bloix put his take on it in very plain and clear language. Unethical monster Dsquared quickly commended this view.

https://crookedtimber.org/2008/09/19/now-for-the-really-big-one/#comment-252506

Markup:
Did you read the full post? That was my point exactly. We should bail out the mortgage holders, not the mortgage lenders. Which would help the whole system, since paying off the bad loans would render the “toxic” stuff healthy.

“Capitalist Socialism??”

What a nice a euphemism for fascism.

During the Vietnam war someone calculated that it was costing approx. one $ million plus for each VC/NVA soldier killed, causing everyone to quip that it would be simpler and cheaper to mail everyone in N.Vietnam a million dollar check and make them all instant capitalists.

But of course that idea, even if economically/financially viable, would have never flown because of the “moral hazard” involved in what would be seen as bribing one’s enemies and encouraging further blackmail via threats of more war.

Likewise, bailing out mortgage holders, while, like mailing every VC a check, might make rational sense at one analytical level, runs into the same moral hazard argument at another, namely the rewarding of both individual real estate speculators on the one hand and poor people who used bad judgment on the other–all to the effect of encouraging the very sorts of decision-making that led to much
much (but certainly not all) of the current crisis. And the problem is, even if EVERY mortgage holder now in default were made whole, it would still do NOTHING about the crises of confidence and the here and now credit freeze which is quickly threatening to immobilize our entire financial system. Already people are having trouble getting car loans and McDonald’s has canceled lines of credit to franchise holders
for store improvements/upgrades. We are risking depression 2,0 here
not just in terms of being in suscession, but in being double the order of magnitude. We are looking at the “least worst” solution. As the economist Herbert Simon once said: “It’s tough enough to find ‘A’ needle in a haystack, let alone the sharpest needle in that haystack.”
What we are talking about here is finding the first needle that will meet the minimum requirements to get us out of the ditch.

I should add that JFK’s admonition that ” life is not fair” applies here.
War is not “fair” either-some people die needlessly and some people make money, but that doesn’t mean the overall effort isn’t worth it.
Whatever losses the taxpayer suffer thru the bailout will be as of nothing compared to the losses the same taxpayers will suffer if the system tanks/freezes.

But virgil, if someone has to be bailed out, why should it be the banks instead of the mortgage holders. Your objections apply equally to all bailouts – unless you want to pretend there are no beneficiaries when the banks are bailed out, but I rather suspect a lot of quite scaredy bankers are disagreeing with you.

I know personally one trader who was a lot more relaxed on Friday than he was on Monday last week. He gets to keep his million pound house with the original art works and the massive tv, while the lower middle class whose debts he traded in are left to the dogs. But who knows, if this bailout hadn’t happened he’d be enjoying the experience of sliding into foreclosure along with those people.

Once the Govt. effectively owns most of the mortgages in some sort of trust/holding company the Govt can bring down the interest rates on the under the water mortgages to ZERO if it wants–then people will come out of the woodwork to buy entire neighborhoods worth of depressed housing that have been walked away from, and this plan
will allow those still in their homes to “work out” their mortgage and stay in their homes. But over and above the nuts and bolts of solving the foreclosure problem is the FEAR FACTOR. FDR didn’t make his famous statement for the helluva it–fear can override not only common sense, but the most basically sound company or Bank. Once a run on Banks start with, say, the next major bank failure, then were
headed down the road to DEPRESSION 2.0 as the credit system freezes totally–as it already is beginning to do so.

Why all in now with the current proposal? In the immortal words of John Mitchel: “If you’ve got to eat shit, do it all in one gulp, don’t eat it piecemeal in small bights with a spoon.” Same reason one rips off
adhesive tape in one fell swoop, rather than slowly peeling it from the skin. Besides, giving power and money to the FED and Treasury now rather than piecemeal authorization is the difference between deterrence and defense. Defense is what you do after deterrence fails.
Power and money upfront will serve to deter the panicked and the crazies from all running for the exits at once secure in the knowledge that a backstop is in place. If the reinforcements are fed into the battle on a piecemeal basis, they will be overwhelmed and defeated in turn by the sure-to-grow-larger size of the problem.

Should executives have their golden parachutes eliminated and their salaries cut as part of the bargain? Hell yes, they’re all rich anyway-make them take their salaries in stock options tied to the performance of the reformulated commercial/financial institutions they will head. This plan will help EVERYONE–both the big kids
and the little people alike. Are some going to unfairly benefit and some be unfairly punished? Yes, but not by as much as any alternative one can think of that can be formulated in time to head off panic. Patton said it best: “A good plan, executed today with great speed and violence is better than the perfect plan executed six months from now.” We don’t have six months. Can’t fiddle while Rome burns, etc.
Congress has a vital role to play in designing a long-term regulatory structure, but not in acting as a fireman. Do firemen “deliberate”
while the building burns? You know what they say about the definition of a camel: “A race-horse designed by a committee.”

When you think about it, the solution HAS to come out of a financial committee. Does one consult submarine commanders for instructions on flying fighter jets? Florists on Battle Tank design and construction?
To even ask the question is to answer it.

PPS: I should have typed: “out of the financial industry.”

Answering too many of your own rhetorical questions there virgil – and most of them are analogies. Makes the argument look weak, makes you sound like a politician practising talking points.

Sorry, sg, should have added to scroll down to Sept 22nd heading. I think if you add”main blog/08/09 it will take you direct.

J Thomas:
I very much agree with everything you say with the usual “but” thrown in order to provide the proper caveats to prove academic independence. Seriously though, the reason most of the world will continue to buy our debt (T-Bills, CMOs, whatever) is that our economy is still stronger and far larger than theirs and, with the exception of China and India, growing faster to boot. They need us to buy what they make and to employ their people in factories making it. China, however is a different story.

China’s leaders are perfectly capable of sacrificing the living standards
of hundreds of millions of it’s people if they thought it would eliminate the U.S. as a superpower. I say this with some confidence as the leadership for the Peoples Army is already on record within the last year as stating that it would be worth losing over 600 million people if they could kill 300 million Americans in turn in a nuclear exchange and remove us permanently as a “threat.” Having said that, short of a nuclear exchange, China has to decide if the job layoffs and high rates of unemployment that would come with wrecking the U.S. economy are worth the risk of widespread discontent with attendant risks to their own power structure. There are already two China’s: the thriving coastal manufacturing areas and the poverty of almost 700 million peasants in the interior. Already there are daily widespread peasant confrontations with the authorities over practically everything–schools, healthcare, you name it–the reporting of which is as widely suppressed as are the protests themselves. Would the leadership of the PRC risk the chance that growing discontent would topple them before the U.S. buckled? Only the Shadow knows, but it would be a big risk and the leadership is nothing if not cautious even if iron-fisted. (Btw, speaking of shadows, one of the best works ever done in understanding the nature of the Chinese regime is an insightful 1977 book [forgotten now but widely hailed at the time and still valid] entitled “Chinese Shadows” by Belgique journalist Simon Leys)

As to the question you posed in your first para., I would again redirect you to my comments on the other post about the problems engendered by the mark to the market rule. Change that back to the pre-Enron rules and the problems of insurance and raising capital will largely go away.

China has to decide if the job layoffs and high rates of unemployment that would come with wrecking the U.S. economy are worth the risk of widespread discontent with attendant risks to their own power structure.

Suppose that we collapsed and china kept right on producing the things they made for our market, only instead of shipping them to us they piled them up in the gobi desert. What would they lose? Only some depreciating dollars that they have no particular use for.

Suppose that instead of piling it in the desert they sold it to their own people. Would that increase discontent? Give everybody a raise and then give them stuff to buy with the money….

Seriously though, the reason most of the world will continue to buy our debt (T-Bills, CMOs, whatever) is that our economy is still stronger and far larger than theirs and, with the exception of China and India, growing faster to boot.

I’m an amateur at this stuff. Suppose you were to measure US economic growth deflated against our depreciated dollar instead of against our bureaucrat-measured CPI. When I look at currencies that are not pegged against the dollar — the hungarian forint, the euro, the philippine peso, etc — they generally show about a 1/3 reduction in value for the US dollar between around 2004 and 2008. Though the dollar has gotten more valuable during 9 months of 2008, maybe out of hope that something will change? Again, as an amateur I wouldn’t definitively say that the value of the dollar is a good measure for relative inflation. But it suggests that our economy hasn’t grown all that fast.

Let’s look at that argument again. There are places in the world where people are making lots of money, but they can’t re-invest their money where they’re making it because their economies are too small to absorb it. So they have to invest in the USA. And they have to believe their money is safe here. So we need the bailout to persuade them that the USA isn’t a giant ponzi scheme? And we hope that will be enough to reassure them?

I would again redirect you to my comments on the other post about the problems engendered by the mark to the market rule. Change that back to the pre-Enron rules and the problems of insurance and raising capital will largely go away.

Would they really? If we have a big recession a lot of people will be laid off. The older ones will never get jobs as good as the ones they lost, even after the recession. Every reason to think that lots of houses will be foreclosed. Will foreign investors keep buying US housing debt on the assumption that we won’t have a recession? I guess if the US government guarantees the debts then it would be like buying T-bonds, huh?

No, wait, the US housing market is dead for the moment, isn’t it? Again I’m an amateur and I tend to assume logical things that I don’t know how to look up. There aren’t a lot of new house-buyers taking out new loans? There aren’t a lot of foreigners buying up US mortgage tranches? There are a bunch of US sales companies holding existing mortgages they can’t sell to anybody?

It looks to me like that train has left the station. We can no longer finance our increasing foreign debt with housing loans. We have to find some other way.

The ultimate long-term quandry for our economy is that as long as there is a Bolivian tin miner still alive willing to double his salary
from fifty-cents/day to a dollar/day assembling washing machines for Whirlpool, no one’s job in America is safe.

Sure. And we can’t cut those guys out while we depend on foreign oil.

The obvious solution to my mind is for our rich people to convert their money to euros, move to monaco or wherever, and then invest in the USA when they see investments that are worth making. The more they do that the less our wealth inequality gets. Is there something I’m missing here? Do they think it’s the US military that keeps monaco from getting invaded?

So the US government solution is to give away a large fraction of a trillion dollars to the people who got caught with the mortgages when foreigners stopped buying them. That’s fine for the institutions that get the money. What about the trade balance etc? Is it too late to get foreigners to go back to giving us their money in the hope that someday they might get even more back? What should we do instead about that?

So the US government solution is to give away a large fraction of a trillion dollars to the people who got caught with the mortgages when foreigners stopped buying them. That’s fine for the institutions that get the money. What about the trade balance etc? Is it too late to get foreigners to go back to giving us their money in the hope that someday they might get even more back? What should we do instead about that?
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