Tag Archives: bailout

Welfare Queens

President Obama and Secretary of the Treasury Geithner have given Goldman Sachs a $13 billion no-strings-attached, no-interest, non-repayable grant

This was operationalized through the AIG Bailout. Goldman Sachs, which has taken billions in TARP funds and other government welfare, and had previously stated it had no material interest in AIG, nonetheless received $13 billion in payments from AIG after the government gave even more money to AIG. Goldman Sachs is not only a fraudster of a company, it is a welfare queen, dependent on the federal government to pay for its reckless, antisocial behaviors.

welfare_queen_fat_woman_goldman_sachs

Other large institutions have benefited as well.

In an inexplicably good move (he, after all, liedjust today on ABC’s This Week by saying he spent his entire career in public service) , Secretary of the Treasury Timothy Geithner has asked for the authority to nationalize large financial institutions. I hope he gets it, and uses it. Zombies such as Citi, and welfare queens such as Goldman Sachs, should be seized, their shareholders wiped out, their officers civially prosecuted for mismanagement and criminally prosecuted for fraud, and their assets transferred to the treasury.

Just as I support a 90% tax on TARP-funded bonuses, salaries, and capital gains, I support the nationalization of zombie banks and welfare queen financiers. Their raids on the Treasury must stop.

Update: Obama has forced the CEO of GM to resign. The head of the UAW, and the CEO of Goldman Sachs, have not similarly angered our President, and still have work.

Thoughts on the Bail-Out

The Bush-Pelosi bail-out passed the House on it second try, its cost now swollen from $700 billion to $850 billion.

The Democratic Party confirmed its status as run by limosine liberals — an upper/lower class alliance against the American middle class

The Republican Party confirmed its status as being run by idiots. While most House Republicans still voted against the Wall Street Bailout, the Republican leadership did everything possible to conflate the economic mismanagement of Democrats with the economic mismanagement of the GOP.

John McCain foolish suspended his campaign to support the bankrupt Bush line, and worked as hard as he could to undermine the House Republicans.

Barack Obama dutifully followed his Party’s leadership in its attempt to nationalize as much real property in the country as possible.

The Republicans demonstrated no ability to handle a complex economic crisis.

The Democrats demonstrated their known ability to manipulate markets, wreck important institutions, and hurt the country.

Whatever the specific fates of the Wall Street firms and their Washington men, it’s hard to think that the US financial system is not irreparably wrecked. What we had before is unlikely to come back. The executive branch sees as its purpose protecting investors from risk, and the legislative branch apparently has ignored the lessons of the 1990s and regressed to economic policies that would be familiar to Adlai Stevenson.

That all said, the candidate with the best economic policies at this point appears to be Barack Obama — prsuming he is lying on international trade, the capital gains tax, and so on. The lack of national health insurance means that the U.S. is the only industrialized country where losing your job means losing your health insurance: this is a systemic break on free trade and creative destruction.

A Stabilization Plan I Can Support

While George Bush and Nancy Pelosi push their plan to subsidize the banking industry, an alternative is being formulated by some in Washington that instead focuses on liquidation and recapitalization, with less spending by the government.

Some details:

Bailout and Accounting Rules: GOP Members Forging Alternative to Paulson Bailout – Financials * US * News * Story – CNBC.com
Components of the alternative plan including the following, according to sources:

* Require the Treasury Department to guarantee, at up to 100 percent, bank losses resulting from failed mortgage-backed securities originated prior to the plan’s enactment. Such insurance, supporters say, would provide immediate value to the securities and a foundation for which they could then be sold. The Treasury Department would finance that insurance by assessing a premium on outstanding mortgage-backed securities.
* Allow companies to carry back losses arising in tax years ending in 2007, 2008, or 2009 back five years, generating a tax refund and immediate capital
* Allow a “repatriation window” for profits earned by U.S. firms overseas. Such repatriation amounts would not be taxed if invested in distressed debt (as defined by Treasury) for at least one year.
* Allow banks to treat losses on shares of preferred stock in Fannie Mae and Freddie Mac as ordinary losses, not as capital losses
* Suspend the capital gains tax rate for two years
* Limit backing of high-risk loans by Fannie Mae and Freddie Mac
* Schedule Fannie and Freddie for privatization
* Suspend “mark-to-market” accounting until the SEC can issue new guidelines that will allow firms to mark these assets to their true economic value
* Stabilize the dollar by repealing the Humphrey-Hawkins Full Employment Act, which alternative bailout supporters say diverts the Federal Reserve’s attention from long-term price stability to short-term economic growth
* Require the Treasury to write rules prohibiting excessive compensation or golden parachutes to executives of failed companies
* Task the SEC with regular, annual audit reports of entities the federal government has brought under conservatorship or now owns

The development of the alternative plan comes as members of the Senate consider voting on the original financial rescue plan as soon as Wednesday evening. The $700 billion rescue bill may be attached to a tax plan that included relief to taxpayers paying the alternative minimum tax, or AMT.

Sounds good. Of course, it’s chief benefit (and probably drawback, in the eyes of Bush, Pelosi, and Paulson) is that it does not write checks to foolish bankers.

The Bailout: Liquidation and Subsidy

The Bush-Pelosi Bailout has two components: first, a liquidation (Secretary Paulson implied that this is the only purpose of the bailout), and a subsidy (CNBC has been focusing on the need for this portion). The liquidation is an attempt to replace the value of subprimes which cannot be sold at today’s prices with cash nominally worth the same, but much more liquid. The subsidy is an attempt to raise the value of those subprime mortgages, so that banks do not have to pay (“lost wealth because of”) their bad investments.

The politicians have been silent on this distinction, and most of the pro-bailout members of the chattering class have simply ignored it. Some more thoughts on the bailout, focusing especially on the subsidy:

The Corner on National Review Online
2) The Paulson-Democrat Wall Street Bailout will not work

· Banks are highly insolvent and the capital hole to be filled would not be filled by this plan – and any attempts to do so under this plan would drive up the cost of the “toxic asset” purchases (see next point)

· The supposed “profit” or “minimal cost to the taxpayer” is predicated on buying toxic assets low and selling them high – yet that inherently conflicts with the price point necessary to inject sufficient capital

· But even when prices are bid up (because Treasury is incentivized to do so to make it work), there is no guarantee banks will use the money to then lend if they are still insolvent and facing a likely recession

· This bill does nothing to deal with the over $60 trillion in largely unregulated Credit Default Swaps that are wreaking havoc with the financial system

· The plan is operationally questionable – with little clarity about dealing with the pitfalls of price-fixing, how a “reverse auction” won’t be easily manipulated to allow prices to get bid up, and other problems

And:

The plan has no restrictions on buying up assets from foreign banks – banks who aren’t active lenders in U.S. markets directly and whose leverage is far greater (40x) than even American traditional investment banks (25x), whose leverage is greater than American commercial banks (10-15x).

· Moreover, many of these foreign banks are currently being or are soon to be nationalized. Therefore, the US government would be buying toxic assets at above market prices to support foreign governments.

Now, it may be wise to spend 700 billion something to help the economy. Universal health care for ten years, two complete interstate maglev systems, or using some of the money to eminent domain the subprimes at domain prices, while using the rest to pay down the debt (that is, not increase the debt). This is a serious issue, and we need an honest debate on it to come up with ideas.

The National People’s Congress considers the Bush-Pelosi Plan

China’s legislative arm is the “National People’s Congress,” a rubber-stamp boddy where votes are routinely 99.9% for the Communist Party’s proposal, and .1% abstaining.

The debate of the Bush-Pelosi Wall Street Bailout seems to be following this line.

As I am watching now, a Democrat spoke about what a great plan the bail-out was. The Republican response… was how great the bail-out plan is.

At least the USA PATRIOT Act was focused on killing people who did bad, instead of transfering hundreds of billions of dollars to them.

Second Order Effects, or, The need to estimate the Death Toll of the Bush-Pelosi Bailout (EESA-2008)

The Bush-Pelosi Bailout, or the Emergency Economic Stabilization Act of 2008, is as expensive as several major wars. Wars are conventionally measured in relative death toll. It may be wise ot measure the Bush-Pelosi bailout the same way.

CNBC this morning informs us the government “does not want to” pay market prices for the subprime properties, that there is “no way” the government will recoup its losses, and so on. If true, this means that the Bush-Pelosi Bailout will be an ‘investment’ in the way that Head Start, welfare, and other government giveaways are ‘investments’ — the plan is foolish, but at least it’s somewhat better than simply burning piles of cash to heat the Congress.

What are the second order effects of this bailout. If Wall Street crashes, and ambitious young people give up on a career in Wall Street and instead focus on engineering, computer science, nursing, research, lives may be saved. On the other hand, if ambitious young people seek to maximize their profits by working in highly-profitable but risk-protected Wall Street firms, the cleverness will flow away from those fields.

How much money is going to be lost? What else can be bought with that amount of money?

Which alternative keeps more people alive?

The Bush-Pelosi Bailout

From an interview with the ex-CFO of Lehman Brothers, a major investment bank that is now out of business:

Erin Callan: Lucky to get out – Sep. 26, 2008
Did Lehman think the Fed would help it?

Yes. No one knew what it looked like for a broker-dealer this big and connected to the world economy to go bankrupt. And no one wanted to know.

Wall Street’s view of big risks has been this: if they win, they should keep the profits; if they lose: the government should pay the losses.

George Bush agrees. Nancy Pelosi agrees. The anchors at CNBC agrees, this morning warning us that buying these subprimes from investors at more than firesell prices would hurt the investment industry.

Well, relatively, yes. Everyone would like a free check for about $200 billion, give or take. Especially if you’ve run your life assuming that the government would save you.

The New York Times has an article on the Swedish bailout, which protected taxpayers and not speculators.

McCain can show his leadership be helping the Congressional Republicans hold out against socialism, and support a bail-out that does not teach bad behaviors. Obama has an opportunity to do the same thing, if he can convince the Congressional Democrats of the same thing.

This redistribution of loss from investors to citizens, if it happens, will be known by the most influential people who made it happen. To now, it has been the Bush-Pelosi plan. If McCain caves, and wins the election, it will become the Bush-McCain bailout. If the Democrats and Bush pass this over Republican objections, it will be the Bush-Obama bailout.

The Bailout

The Bailout, as it is currently being talked about, is bad policy and must be defeated.

Secretary Henry Paulson, Chairman Ben Bernanke, and President George Bush are advocating a bailout that will buy home mortgages from financial institutions in exchange for cash. Because these institutions are free to buy or sell any time — if at prices they find distasteful — the plan advocates paying above-market rates for mortgages, and allowing the financial institutions to keep the profits.

There are two components to this plan. The first is making the investments of financial institutions “more liquid,” or more easily transferable to something else. Cash is very liquid. A mortage which is hard to sell at the price you want is not. Secretary Paulson emphasized the need for liquidity in his original address on the matter last week. Illiquidity is a well known economic problem, and this is one we should take seriously.

The other component of the plan is to transfer wealth from tax payers to these large financial institutions. The wealth transferred is the difference between what we pay for these mortages, and what the institutions could make if they just sold the mortgage. For instance, if the government pays $200,000, but the bank could only sell it for $100,00 (perhaps to the individual who is currently making the mortgage payments, perhaps to a foreign investor, perhaps to a local government, etc), then we would be transferring $100,00 worth of wealth from the taxpayers to the financial institutions. This is horrible. It reinforces bad behavior, it sets an example for others, and it prevents the market from learning the full lessons of this disaster.

On CNBC yesterday, some hosts were saying that this is “everyone’s fault,” that “no one is innocent,” that “we are all to blame.” This is not true. It is not the fault of those who did not take out risky loans, or who paid their mortgages, or the investors who were wise with their money. It was the fault of individuals who were more-than-average stupid and took out loans they could not pay back, and investors who were more-than-average risky and gave loans they could not collect. It is the fault of politicians whose response to the low credit available to blacks and hispanics was “this is racial discrimination,” rather than “this is a reflection on the relative credit worthiness of groups within the American population.” This is the fault of bad officials, bad investors, and bad politicians. It is not everyone’s job.

On NPR this morning, a reporter said that Goldman Sachs estimated that the plan — which will initially cost $700 billion — will recoup $500 billion, leading to a net transference of wealth from taxpayers to investors of only $200 billion. If this is true, two alternatives to the bailout present themselves:

1) Because the government will on average be paying 7/5ths of the actual value of the mortgages to the investors, then the investing institutions should make up the difference in non-voting preferred stock. That way, the institutions still become more liquid, the owners of these risky firms are not unduly rewarded, and the government’s investment is protected both by the value of the mortgages and the value of the preferred shares.

2) Eminent domain the illiquid assets. If your house is in the way of a new highway, or new shopping mall, that your government wants to build, it will use its constitutional power of “just compensation. While we might squabble whether the “just compensation is the current market value or the market value the U.S. government could most probably get for these properties down the road, it would not be as much under the current bailout.

All we now hear — of talk of limiting executive pay packages — is well and good, but does little to protect taxpayers from investors. It is a red herring away from the real problem: a $200 billionish giveway as a reward for incompetence.

As I write this, John McCain has already suspended his campaign and traveled to Washington to join in the negotiations. If the bailout passes in its current form and John McCain supports it, his suspension will have been a gimmick and he will display the same big-government approach to policy that I would expect from Richard Nixon. If a the bailout fails in its current form, and we don’t encourage such bad behavior by transferring hundreds of billions in wealth, then John McCain will be a leader of the same quality on economic policy that has been on the Iraq War.

What does China think about the bailout?

All the talk these days is of the government bail-out of the foolish (high-risk when already ahead) banks who sold mortgages to people who could not pay them back. Some of the banks then turned around and sold these bad mortgages to even more foolish banks, who are in even worse trouble. This has already destroyed the large investment banks of the United States, with every one of them now bankrupt, bought, or transformed. But the liquidity trap (see this excellent column by Paul Krugman explaining the problem, courtesy of Marginal Revolution). It’s a complex issue, and I do not understand it. Too many smart people are saying too many different things, many of them unexpected

So instead, I’ll trust China. China has nearly as much of a stake in America’s economic status as we do, and China (unlike America) has a ruling class made of engineers, instead of lawyers.

But what does China think about the bailout?

China Expat says that China is belittling the idea:

As China Finance, China News, and Chaobao Financial News stated, these actions by the Federal Reserve is only “creating money that does not exist which leads to the inflation of liquidity,” and that by showering the bailout on just a handful of stupid financial companies (my take), the Federal Reserve is “only protecting and encouraging large companies’ wrong doing.”

Yet McClatchy newspapers says that China cheers the news:

China voiced reassurance that the U.S. plan would contain the crisis, while South Korea and Japan pondered whether it would provide protection for banks that are holding distressed American mortgage debt.

As stock markets rallied around East Asia, analysts worry that Washington will print more money to finance the bailout, an action that could weaken the U.S. dollar, lift commodity prices and fan inflationary pressures.

President Bush called Chinese leader Hu Jintao early Monday local time to explain the $700 billion rescue plan of the U.S. financial sector, which is shaping up as possibly the largest bailout of private industry in American history. The state news agency, Xinhua, said Bush told Hu that “his government was well aware of the scope of the problem, and had taken and would continue to take necessary measures to stabilize the domestic and world financial markets.”

So what does China think of the bailout?