Buying Wall Street

BUYING WALL STREET....Over at the Wall Street Journal editorial page, zillionaire hedge fund guru John Paulson outlines what he thinks is a better alternative for stabilizing markets than the current bailout plan. Paulson, of course, is famous for betting a couple of years ago that the mortgage market was going to collapse and becoming rich from his foresight, so that makes him worth listening to.

And unlike, say, the blatherings of the House Republican Study Committee, his plan isn't self-evidently idiotic. Basically, instead of having the Treasury buy up toxic mortgage securities, he thinks they should directly recapitalize the financial system by purchasing senior preferred stock in failing banks:

The financial market is stabilized, companies get recapitalized, failures are avoided, debt securities are supported, and time is gained for illiquid assets to mature.

The institutions continue to function, their cost of funding will decline as equity capital increases, and innocent third parties like bank depositors, broker/dealer clients and insurance-policy holders are all protected. The only difference is that potential losses are kept with the shareholders where they belong.

Paulson thinks his plan is superior to the current proposal on several counts — and although I'm not sure he's right about that, that's not what gets me. What gets me is that the Wall Street Journal editorial page is now running pieces that essentially suggest nationalizing failed banks — which is exactly what this plan would do if the required capital infusions are large enough (which they probably would be, since it doesn't take much capital to buy a majority stake in a failing bank). Conversely, I, the liberal, am really queasy with this notion. I'm all in favor of better regulation, but the federal government already owns one of the biggest insurance companies in the world, and I'm not thrilled at the idea of them acquiring any more of Wall Street.

We're in looking glass territory here. Am I too queasy about taking over banks? (That's a serious question. Am I?) Is the Journal too sanguine about it? What's going on?

feffer.jpgAs part of our special investigation "Mission Creep: US Military Presence Worldwide," we asked a host of military thinkers to contribute their two cents on topics relating to global Pentagon strategy. (You can access the archive here.)

The following dispatch comes from John Feffer, codirector of Foreign Policy In Focus at the Institute for Policy Studies in Washington, DC.

Surrounding China's String of Pearls

In 1919, the English geographer Halford Mackinder argued that control of the "Eurasian heartland" was the key to world domination. Mackinder believed that Eastern Europe was the gateway to controlling this huge landmass stretching from his home country to the far shores of Asia. And indeed, Eastern Europe proved pivotal in the next conflagration, World War II, as well as in the US policy of containing the Soviet Union in the Cold War era.

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As Capitol Hill negotiations on the Wall Street bailout proceeded on Friday afternoon, Representative Brad Sherman, a Democrat who has questioned the under-construction plan, sent out this brief message to his fellow House Democrats:

Skeptical about the Administration's $700 Billion Bailout Plan?
Dear Democratic Colleague:
Please come to a meeting of the Skeptics Caucus to discuss President Bush's $700 billion bailout bill. One staffer may attend with you.

The main story today about the bailout is that House Republicans are raising objections to the proposal and blocking a deal. But there are House Democrats worried that the deal-which would let the federal government buy up $700 billion of bad paper from Big Finance firms-- is moving too fast and is too problematic. How many? Let's see who shows.

So the debate is on. What's going to happen?

mccain_debate_ad.png Well, if you believe the McCain campaign, their man has it in the bag. The ad at right is already running on the web. It was spotted by Chris Cillizza.

For my part, I actually don't think candidates ever really win or lose these things. Following the debate there will be approximately one zillion mouth-hours spent by TV pundits and campaign surrogates talking about how candidate A delivered a commanding performance or how candidate B convinced America that he is presidential enough for the job, but historically the best a candidate can expect to get coming out of a debate is a 2.25 point bounce. When Bush lost 2.26 points coming out of the first 2004 debate with Kerry, it was the largest single-debate swing since 1988.

The best a candidate has ever done over the course of an entire debate season (there are, as you almost certainly know, two or three debates every campaign), is a 3.5 point bounce, which Bush got in 2000 after his three debates with Gore. The average swing after a debate season, dating back to 1988, is a paltry two points. And there's nothing to say that that two point bounce isn't wiped out by the events of the campaign's homestretch.

Analysis of the debate is of course welcome. But when the talking heads reach into their bag of sports analogies and tell you that one of the candidates "landed a knockout punch" or "hit a home run," don't believe them. It's a safe bet that both candidates did well enough to reassure their supporters but not well enough to swing an appreciable number of undecideds. Journalists would spend their time better by fact-checking the candidates, searching for hypocrisies or panders, and examining the candidate's answers for reflections of character, readiness, and future policy decisions.

(Much love to for help with the numbers.)

Update: Really good video on the history of presidential and vice-presidential debates over at PBS.

BETTING ON THE BAILOUT....Brad DeLong on the modified Paulson plan:

To get get a $500B macroeconomic gain in production and employment, Paulson wants to take on a position with an expected value of -$100B. But the true value of that position could be anywhere between +$200B and -$400B. Looks like a good bet to me.

I think that's right. In fact, I think the bet might even be a little better than that. With the equity provisions now in place, along with the plan's implied commitment to do whatever it takes to keep the economy stable even if it requires more than just the current bailout, there's a pretty good case to be made that taxpayers are unlikely to lose money on the deal. Conversely, although $500 billion seems like a reasonable guess about the cost in GDP contraction of doing nothing, there's a sizeable chance of it being way worse. In that sense, it's sort of like global warming, where you really have to pay attention to the small but nontrivial chance of catastrophe.

Still, at a minimum Brad is right: it's $100 billion vs. $500 billion. That's an easy bet. He also has about the best short summary of yesterday's events I've seen:

John McCain announces he is suspending his campaign, cancels on David Letterman, gets made-up for and does an interview with Katie Couric, goes and talks to the Clinton Global Initiatiive the following day, persuades Bush to call a meeting at the White House, gets to Washington DC in the afternoon, goes and talks to the House Republicans, goes to the meeting, sits in the back of the meeting and is evasive, and when the meeting breaks up, three things are clear:

  • John McCain won't say what financial rescue packages he supports or opposes.

  • George W. Bush won't say that support for Paulson is a test of Republican loyalty.

  • The House Republican caucus doesn't support their leaders.

  • The House Republican caucus doesn't have an alternative plan.

That's quite an accomplishment. It is hard to read it any other way than as John McCain rallying the House Republicans to blow up the bipartisan agreement that was being negotiated. The House Republicans don't want to do anything to hold CEOs accountable, to protect taxpayers, protect homeowners, or provide oversight. The Treasury rejected the not-quite-ideas they put forward at the White House meeting last week.

And he passes along this nugget from Politico:

According to one GOP lawmaker, some House Republicans are saying privately that they'd rather "let the markets crash" than sign on to a massive bailout. "For the sake of the altar of the free market system, do you accept a Great Depression?" the member asked.

God save us from the Republican Party.

I asked Republican political consultant Marty Youssefiani what he thinks of the politics of the House GOP ploy to blow up at the last minute the bailout deal worked out between the Republican White House and Congressional leadership. Youssefiani responded:

Well, there should be no surprise that politics is in the mix here, but at the core there are legitimate philosophical diffrences. Don't forget, laissez fair is cooked before our eyes. At the end though we will have a deal otherwise the country will tank, take down the global market and with it directly heighten the prospects of flash conflicts worldwide.
The big issue here is a failure in communication with the public: Main Street simply does not fully grasp what this crisis means and how quickly it will be affected if Wall Street is not bailed out.
As for McCain, it's no secret that economics was not what he learned on the "flight deck," but can he get creative and turn the issue in his favor? My sense is that this mess puts the election away, unless he leads in shaping a creative alternative plan that includes immediate direct aid to Main Street. One way he can get on the offense is to throw some of this funny money to the people (i.e. stimulus checks, one-time retroactive tax credits per household, and government mortgage guarantees, etc.). Can't bail out the fat cats without throwing something to the people! It would be popular, change the narrative and provide evidence his "suspension"/ 24-hour Washington stop was more than bad theater.
I'd [advise McCain to] use the stage at Old Miss tonight to pitch the offense. With 90 million Main Streeters watching, show what it means to shake things up!

In case you hadn't already predicted that McCain will play the populist looking out for the interests of Main Street, now you've been warned.

From the New York Times article on the largest bank collapse in American history:

But the seizure and the deal with JPMorgan came as a shock to Washington Mutual's board, which was kept completely in the dark: the company's new chief executive, Alan H. Fishman, was in midair, flying from New York to Seattle at the time the deal was finally brokered, according to people briefed on the situation. Mr. Fishman, who has been on the job for less than three weeks, is eligible for $11.6 million in cash severance and will get to keep his $7.5 million signing bonus, according to an analysis by James F. Reda and Associates.

That's right. The chief executive of WaMu is getting $19.1 million for three weeks of work. Natch. And these are the people taxpayers are supposed to be bailing out?

McCain Blinks

McCAIN BLINKS....So I guess John McCain has blinked after all. The pull of the klieg lights was just a little too enticing for him, so he's abandoning his role as Savior of the Bailout to head to Mississippi tonight for his first debate with Barack Obama. In possibly the most laughable comment of a laughable campaign, he claims that he's able to do this because negotiators are now making "significant progress" in talks that would have been finished yesterday if he hadn't parachuted heroically into Washington in the first place.

Still, give the old guy credit. He knows how to put on a show. If I were hiring a PR-Exec-in-Chief, he'd be my first choice.

McCain's Stunts

McCAIN'S STUNTS....John McCain biographer Matt Welch writes in the LA Times today about McCain's fondness for political stunts designed to draw attention to his own virtue:

But if McCain's latest "country-first" outburst is a mostly empty symbol in terms of actual campaigning, it's a meaningful one in other ways. By taking what was originally Obama's behind-the-scenes initiative of cobbling together a joint candidate statement on the bailout package and opportunistically turning that into yet another chance to portray his patriotism as shinier than his opponent's, McCain is ripping what little facade remains over his campaign. This is not an election about ideas or policy; it's an election about a Great Man, facing down an interloper.

....But as many Great Men come to learn, there is a colossal downside built into running a campaign on outsized personal virtue. The line between stoic, honorable service and showy moral vanity is oftentimes difficult to maintain.

And when a candidate confuses his own political ambitions with the fortunes of his country, that's when Great Men turn into self- parodies.

On the other hand, David Brooks, even after watching the events of the past two weeks, can still say of McCain, "He is, above all — and this is completely impossible to convey in the midst of a campaign — a serious man prone to serious things." He might want to rethink that.