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More Notes on the Bailout
MORE NOTES ON THE BAILOUT....Nathan Newman has a pretty good post over at TPMCafe defending the bailout legislation. Take a look. Among other things, he notes that we're bailing out Wall Street on an ad hoc basis already and creating an exclusive troika of megabanks in the process. Whatever its weaknesses, the bailout legislation is probably a better deal than allowing this to continue.
And while we're on the subject, here's a question: assuming the bailout eventually passes, how good a deal are taxpayers likely to get when Henry Paulson starts doling out his $700 billion? The conventional wisdom across a remarkably wide ideological spectrum is that Paulson is a creature of Wall Street and will end up offering sweetheart deals to all his old pals when he begins buying up their troubled assets. But this deserves a closer look.
See, Paulson is a creature of Wall Street. And the way you become successful on the Street is not just by being the smartest guy in the room, but by being the toughest guy in the room; the guy who drives harder bargains than anyone else and always comes out on top. The top execs on Wall Street might be arrogant, they might be crazy, and they might be greedy, but they play a testosterone-fueled game to win. This is practically their religion.
Paulson now works for the United States Treasury, but his instincts are the same as always: even if for no other reason than to boost his own ego, he's going to want to drive the hardest bargains possible — and the weaker the opponent, the harder he'll push.
Don't believe it? Take a look at the Fed/Treasury actions so far. Was the Bear Stearns rescue a sweetheart deal? No. In fact, the original $2 per share terms were so onerous that JP Morgan, which bought Bear, eventually raised the offer voluntarily. And what about Lehman Brothers? Would a Wall Street crony have let Lehman fail? Nope. The next day AIG was rescued, but read this and tell me if you think AIG got any kind of break in return for its $85 billion loan. They didn't. AIG got hammered.
Now, these have been a combination of Fed and Treasury actions, and their track record on other bailouts has been mixed. And I'd be happier if the bailout bill had even more oversight and tighter restrictions on equity sharing than it does. But that aside, the evidence suggests that the Treasury and the Fed are hardly a bunch of pushovers. They deserve to be watched like hawks, but when everything is said and done, I wouldn't be surprised to see them demanding some pretty harsh terms.
"Paulson now works for the United States Treasury, but his instincts are the same as always: even if for no other reason than to boost his own ego, he's going to want to drive the hardest bargains possible ? and the weaker the opponent, the harder he'll push."
And you know this based on your extensive personal experience with the man, right?
Kevin, you supported the Iraq war and all sorts of other Bush nonsense. Maybe this is just time to 'fess up and admit that your policy instincts are horrible.
"Paulson now works for the United States Treasury, but his instincts are the same as always: even if for no other reason than to boost his own ego, he's going to want to drive the hardest bargains possible ? and the weaker the opponent, the harder he'll push."
And you know this based on your extensive personal experience with the man, right?
Kevin, you supported the Iraq war and all sorts of other Bush nonsense. Maybe this is just time to 'fess up and admit that your policy instincts are horrible.
Question:
If the next bailout bill gets passed, and is better than the first one, does Kevin admit his hysteria was misguided?
How come the world didn't fall apart today?
Drum, you are an utter buffoon. Here you go again with your childlike trust that has caused you to be burned on numerous issues, most notably the invasion of Iraq, since your CalPundit days.
Any bailout of these guys is a despicable outrage. This will end up costing the US working class possibly trillions of dollars, with no fundamental overhaul or fix to the problem. Good money after bad.
This market correction, painful as it may be for some, must occur. What you are now advocating is a government that steps in and relieves the risk to the wealthy for their stupid and cravenly negligent investments.
You are advocating crony capitalism in our country. You and those who share your views are asses, and you deserve everything you're going to get. Unfortunately, you will take the rest of us with you.
Hope is not a strategy.
And in other news, the Nile River has been seen meandering through the OC.
rory: How come the world didn't fall apart today?
It's a bit like entropy. If you think things are in a mess right now, just wait.
I won't go quite so far as slammin' sammy, but I agree that pretty much any trust in Paulson to act in the interests of the people of the US (versus a few particular ones) is misplaced.
Look at his initial plan. He didn't create a plan as a servant of the people and steward of the economy. He created a plan that served the worst authoritarian impulses of the Bush administration and that mentioned only a one-way transfer of taxpayer-funded dollars. It couldn't have passed, and he can't be so stupid as not to know that, ergo it was also a negotiating ploy, against other branches of government and the interests of the people generally (vs. the special interests of Wall Street), rather than a genuine attempt to solve a problem.
Now, maybe he was just following orders, but that's immaterial; he'll have to follow orders later.
His behavior has shown him not to be worthy of trust. I'm not willing to gamble a trillion dollars and the near-term future of the economy on some romantic notion of a "testosterone-fueled" super-Secretary.
Those were failed, insolvent institutions. The premise here is that Treasury will buy distressed debt from financial institutions in a manner that will leave them better capitalized and let them continue to operate in their current forms. That by definition requires overpaying for the assets.
"creating an exclusive troika of megabanks in the process. "
The problem, Kevin, is that the honest voters among us are interested in more than "fixing" the problem today, we are interested in fixing it long term. And we see fsckall evidence in the bills being passed that long term fixing is any part of the plan. Oh, sure, we are told, better legislation will follow "at a convenient time". And when that convenient time arises, and that legislation is not passed, then what?
Exactly WHAT compensatory legislation was passed after the S&L imbroglio? The repeal of Glass-Seagal? Lowering cap gains rates, upper income tax brackets, and the estate tax? Phil Gramm's prevention of derivatives oversight?
I'm sorry, but we've seen this BS a little too often. The bailout passes accompanied by the set of measures that prevent it occurring next time, or it doesn't pass at all. No fairy tales about the legislation next year.
So what do we want:
Well start with the item I quoted. Why exactly are we allowing ANY financial institution to be so large that its collapse threatens the system? What's wrong with hundreds of institutions small enough that the collapse of none threatens the system. Easy enough to enforce --- just say that any institution above a certain size can't do business with the US govt, can't participate in treasury auctions, can't take part in FDIC, can't borrow from the Fed, etc etc.
Then the transparency items --- single clearing house and all that.
Then the structural incentive issues --- replace options with shares that can't be vested for many many years, much higher income tax rates at "excessive" levels of income.
We get those, and then we can talk.
How come the world didn't fall apart today?
Here, try an analogy "How come my melanoma didn't kill me today - I don't need no stinkin' chemo!"
It's a bit overdone, but for anyone whose employer couldn't make payroll, the world did fall apart today. Given current LIBOR, probability is higher that there will be more, rather than fewer, next week.
A few failed businesses won't do serious harm to anyone but those directly affected, but a cascading failure IS POSSIBLE.
We've stumbled - once we hit the ground with our face, it's going to be a while before we get back up. And by then, various sovereign investment funds will have happily snapped up lots of real estate and corporate securities at tag sale prices.
Makes me wonder if the IMF will get involved and impose "austerity measures" if the US economy craters. From what I hear, that's no fun, although the wealthy have tended to manage to get their single-malt and grass-fed beef while everyone else is making do with rice and beans.
That could be good for us in the US - after having a good laugh at our expense, the rest of the world might be more likely to give us a hand to get back up. Maybe not, though - I usually keep my mouth shut when the visibly armed colors-wearing biker spills his beer at a bar.
And if we're going to look into the psyche of Hank Paulson for how tough he'll be or what actions he's going to take, let's not forget he's out of work in a few months. I don't know what his future plans are, but whatever bargain he drives is unlikely to be independent of where he sees himself in January.
The vast majority of these web pundits, like Drum, admit that they are not economists and don't understand finance. Yet they criticize those of us opposed to the bailout, saying we 'just don't get it'.
So why don't Drum and you others heed the advice of those who do 'get it', over 200 PhD economists who oppose the bailout, who advocate caution, and most importantly, hearings and the like:
http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_pro...
It sure would help a lot if that mortgage paper could be valued at 50 or 75% of face, rather than the ZERO the current rules, instituted 10 months ago, insist upon. FASB 157 valuation has proved to be a disaster, since it drives the market to zero despite real values.
The way the Accounting Board has it set up, once the market refuses to trade a type of security, it goes to zero dollars on the balance sheet (mark to market at "sale" price), and therefore no one will buy it -- even if they see value -- because it's a financial black hole (having to be carried at $0 value).
Repealing the FASB 157 valuation rule ("mark to market") might make the problem go away, but will at least greatly reduce it.
See, Paulson is a creature of Wall Street. And the way you become successful on the Street is not just by being the smartest guy in the room, but by being the toughest guy in the room; the guy who drives harder bargains than anyone else and always comes out on top. The top execs on Wall Street might be arrogant, they might be crazy, and they might be greedy, but they play a testosterone-fueled game to win. This is practically their religion.
Goddamn, Kevin, this is one for the record books. I've been reading you since the Calpundit days, and while I often get annoyed at your milquetoastian "sounds about right" reactions to utter stupidity or cynical political fantasymaking; this is just IDIOTIC.
WHERE is Paulson going to be in five months? OUT OF WORK. Where is he going to be looking for work? WALL STREET.
Do administration officials give the industry sweetheart deals and then immediately go to work (lobby, etc) for that same industry? YES. Have they often done that? YES. Have they done it over far smaller sums that 700 billion? YES.
Tragically stupid of you, Kevin.
I almost imagine reading you in six months where you'll be saying "No one could have predicted Paulson would have given away the store like that."
Tragic.
anonymous guy on the internet: Never thought of it that way before - even though I was not for the bailout as it stood. Your argument makes a lot of sense to me. I guess Kevin and others haven't noticed the corruption surrounding Bush and his circle. I'd say you were just about right.
In fact, the original $2 per share terms were so onerous that JP Morgan, which bought Bear, eventually raised the offer voluntarily.
It wasn't really voluntary, JP Morgan's lawyers badly fouled up when drafting the original agreement. Which gave Bear leverage.
"Paulson now works for the United States Treasury, but his instincts are the same as always: even if for no other reason than to boost his own ego, he's going to want to drive the hardest bargains possible and the weaker the opponent, the harder he'll push."
And you know this based on your extensive personal experience with the man, right?
Kevin, you supported the Iraq war and all sorts of other Bush nonsense. Maybe this is just time to 'fess up and admit that your policy instincts are horrible.
So, is this like what happened in Japan? (they had a real estate bubble that left banks essentially insolvent, I think) What they did didn't work. Is this different? Better?
That's wierd - I posted the one right above with the normal auto fill and it came up as anonymous.
John Hussman, fund manager and economist makes this suggestion which makes some sense... he is a critic of the Paulson plan and the voted down version on fundamental balance sheet terms:
"The better approach would be for the government to provide capital directly, in the form of a "super-bond," in an amount no greater than the debt to bondholders. The "super-bond" would be subordinate to customer liabilities, so it could be counted as capital for the purpose of capital requirements, and would be seen by customers as a legitimate cushion of protection. However, in the event of bankruptcy, it would have a senior claim in front of both stockholders and even senior bondholders. Do that, and you've actually got a mechanism to protect the financial system while at the same time protecting customers and taxpayers. Ideally, the super-bond accrues a relatively high rate of interest so that financials have an incentive to shift to private financing as soon as possible, but you would also defer the interest until the bank meets a minimal level of profitability to make sure that the financing doesn't strain the institution's liquidity. "
read the whole thing here:
http://www.hussmanfunds.com/wmc/wmc080929.htm
Failure to rescue Lehman sez Paulson didn't bail out a Street buddy?? No, it sez that he just let a competitor get flushed down the commode.
I deal with Japan daily on business... on the one hand what the Japanese government did actually postponed the problem and contributed to a long long recession and period of no growth. about 17 years....
I have visited Japan over 20 times since then. The trains still run, they have universal health care which costs about 4% of GDP, people still go out to eat, drive cars, buy cell phones. companies and banks went bankrupt but fundamentally in a very Japanese way they shared the loss which lasted a long long time.
This will never work in America, and most Americans wouldnt accept it.
but it is funny that the Japanese major banks Mitsubishi and Nomura are the two names mentioned as potential buyers for Morgan Stanley and Goldman SAchs...
so the country that doesnt insist on double digit growth but rather decides to carry its population on the back of a tortoise ends up winning the race?
Also I recommend to look at the international website of Der Spiegel, they have a 5 page devastating report on the end of America's position in the world, economically and geopolitically. Done in the classicaly snarky German manner.
Kevin, you are deluded to think that Paulson is some moral white knight who is going to slay the dragons of wall street for all Americans.
Paulson is part of the problem dumb shit. You are starting to become part of the problem with your myopic views on how the world works.
Americans do not owe the minority of wall street investors (including yourself) ANYTHING. You put your money at risk when the smart people were telling you not to and deserve the drubbing that you and others are getting. Boo Hoo!
Think about all the folks in the US and in the world that don't have the money to invest in wall street ponzi schemes to bilk the public. They don't think much of your whinning.
"Paulson now works for the United States Treasury"
Yeah, just like (to take only one egeregious example) Gonzo and Monica (I swore an oath to George W. Bush) Goodling and company worked for the US Justice Department. Or like Paulson didn't decide to save AIG (but not Lehman) when his good buddies at Goldman Sachs were on the hook for $20 billion. Kevin, this post is either breathtakingly stupid (after the last 8 years) or you've decided to become a rethug hack.
Marlowe: "Never attribute to malice that which can be adequately explained by stupidity."
I think Kevin's just being fatuously gullible.
> And the way you become
> successful on the Street is
> not just by being the smartest
> guy in the room,
I assume those really, really smart guys were hanging out in the hookah room for the last 2 years while their firms drove our economy into the ground? But they collected their bonuses that taxpayers _earning_ less than $50,000/year will now pay for, so maybe they are smart...
Cranky
Kevin - one little problem with your whole defense of Paulson: he is out of office in 4 short months, so will not be the person trying to liquidate the Big Shitpile down the road. DUH. . .
Now, getting back to reality . . . In order to polish his resume, Paulson has to buy this shit at a high enough price to successfully re-capitalize the troubled banks - & that is all so he has more incentive to pay a higher premium over market. Otherwise we are still in a frozen credit crisis & Paulson's job prospects are non existent. Granted, whoever the Sec Treas is down the road will likely try to get top dollar for these so called assets when the time comes to sell (or maybe not.). But chances are top dollar at that time will be less than the purchase price. By that time, the paper will be absolutely worthless, & the real estate it was written on will be worth LESS also. But I digress; for this reason, we meed enough govt ownership of these banks to have any hope of breaking even, much less turning a profit. Let's face it; turning a profit is a huge pipe dream.
Kevin, I sympathize with your point of view, but I think you're wrong. Paulson may be cut of the same competitive cloth, but he is on short time. He doesn't have much of an incentive to craft a sustainable long term solution to America's banking problems.
Congress needs to write laws that both punish the bad behavior and reward the good behavior. It might take some time to do it, but look at the alternative. How much of the Iraq/Afghanistan war was funded through "emergency" spending? And how's that going?
Everything Paulson does is an audition for his next job--probably back at Goldman...
Which company was one of the major players in the mortgage mess? Goldman Sachs. Who was CEO of Goldman Sachs during the buildup of that mess? Paulson.
Paulson is one of the perpetrators of this crime, not the public's savior.
It's as if your home had been invaded by a criminal gang who proceed to gang-rape your wife. After a while, one of the rapists comes over to you and offers to stop the other guys from continuing to gang-rape your wife; all you have to do is hand over your daughters.
Tell you what, Kevin: Give Paulson a loaded gun, then tell him if the situation is so dire and desperate, he can prove it by putting the gun to his head and pulling the trigger. If he's willing to do that, I might believe his motives are sincere.
Hey Kevin,
I just wanted to say, that I really appreciate this post. It's clear that most of the people posting here don't agree, but I agree with your premise one hundred percent.
The Policy Conversation and real objectives of the credit market crisis have been lost to Politics. That's not surprising, but it has lead to this populist backlash from all over the internet. I can't even read Daily KOS these days. They have all gone insane.
I don't think people understand that this "Bail Out" is not "THE BAIL OUT". It never was. It is a response to a credit market collapse. That's it.
To grant them some credit, they are right, this will not fix the coming recession. It will not create jobs. It will not protect homes.
Obama is going to have to pass those bills. And will have to spend a trillion more dollars doing it (or much more).
This bill is only to stop a systematic collapse of the markets.
Too many people seem eager for the "Fight Club" answer, "Bring it all DOWN!!! Let them fucking BURN!!!"
I'm confident they have no idea what is really going on, or they refuse to see past the politics.
Anyway, thanks for this post. No one seems to have the balls to write this on any of my regular blogs.
Finally, agree completely with you regarding Paulson. He crushed AGI. He payed peanuts for 79% of the company, fired the board and fired the CEO. He fired everyone at Fanny and Freddy. Let Lehman tank. He has been merciless. There is no evidence that Paulson is giving hand outs. He seems to be fighting tenaciously for our side. I think he also knows, Democrats will be in charge next year. Imagine the special prosecutor if it appeared that he gave Goldman a sweetheart deal. He's not that stupid.
Excellent post, Kevin, and you've helped move me from cool to the bailout idea to lukewarm. It's a bitter pill, but one we must swallow. My only concerns are oversight and regulatory reform. Regulatory reform can be added later, but strict oversight has to be included now.
Remember that the 1st chairman of the newly organized SEC, appointed by FDR, was Kennedy patriach Joseph P. Kennedy, who by dint of having been a ruthless SOB had no illusions about what his peers would try to do.
Okay, I've got to say that I'm with Kevin on this one. He gives concrete examples of where Paulson has stuck it to those companies needing handouts. Can anyone who disagrees point to an example of where Paulson has given a sweetheart deal to a company that is getting taxpayer money ?
And, for the record, I am against any bill that does not include taxpayer equity.
"It sure would help a lot if that mortgage paper could be valued at 50 or 75% of face, rather than the ZERO the current rules, instituted 10 months ago, insist upon. ...
...
Repealing the FASB 157 valuation rule ("mark to market") might make the problem go away, but will at least greatly reduce it.
Posted by: Kevin on 09/30/08
The market doesn't know how to value the houses. So, why not let the 'homeowners' refinance? The mortgage lender and the homeowner who understand the homeowner's cash-flow and net worth and the relative value of houses in a neighborhood can determine it's new value.
"mark-to-market" accounting is regulated and Chris Cox hasn't let anyone have leeway in this crisis -- another bit of evidence the Bush administration wants people to suffer. I wouldn't suggest deregulating it (a la Phil Gramm) just to overcome Cox's tight-fistedness. I'd leave the law as it is and let the next SEC chairman apply good common sense as to when to ease it and when to retighten it.
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