Tag Archives: subprimes

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


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 Financial Crisis, or, The Power of Nightmares

With a word-change here and there, and of course different visuals, BBC’s The Power of Nightmares works remarkably well for the current Financial Crisis.

Of course, a nightmare can manifest itself in reality. It is possible that the cries of Wall Street of Money, the cries of the Administration for Trust, and the cries of Congress for Power are well founded and not just a reflection of their perpetual desire for money, trust, and power.

We’re not given logical arguments for why such a thing might be true, other than vague arm waving, secret documents we can’t access, and the deeply held beliefs of truly incompetent people. Then again, even a stopped clock is right twice a day.

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.