Sunday, September 28, 2008

Vote Against Them

It looks like there's a decent chance that the bailout will pass today or tomorrow. If it does, the campaign against those that voted for it will begin.

I know there are a lot of people who think we need to do something to help unfreeze the credit markets. I don't disagree with you. However, I think this bailout plan is worse than nothing. This plan contains no requirement that forces the banks to lend. There's still a lot of magical thinking in this concept; that suddenly banks will trust each other once this facility is there to absorb their bad bets. In the short term, there will still be a credit crunch because it'll take time for Treasury to value and redeem. Since there's way more than $700B of bad paper, Treasury will have to perform some kind of triage. Triage will also determine who gets to redeem first. Winners will be picked all along the line, and losers will be hung out to dry. Just because a company has illiquid paper on its books doesn't mean they'll be allowed to participate.

The faster Treasury acts, the more arbitrary and unfair the process will seem. The slower they act, the longer the credit markets will remain frozen. Many companies will fail just because they weren't picked soon enough. Many others will fail because they weren't picked at all. The potential for corruption is tremendous.

The effect of this triage is already being felt. From the Clusterstock blog:

Citigroup Asking Feds To Backstop Wachovia Deal
Henry Blodget | Sep 28, 08 8:32 AM

Citi execs are meeting to discuss buying Wachovia, CNBC's Charlie Gasparino reports. Charlie says the deal depends on whether the feds will backstop Wachovia's mountain of bad debts. The press leak, meanwhile, is presumably in part an attempt to plant this seed and build support for such a bailout.

We can now presumably assume that, if the feds DON'T agree to backstop a deal--and soon--Wachovia will probably go to zero. Why would Banco Santander, Wells Fargo, or any other suitor step up if Citi has already tested the bailout waters and been denied?
I ask you, why would Wachovia need to sell itself if it could use the TARP to sell its bad paper? The answer: because the bailout is arbitrary.

If Congress and Treasury want to pick winners by passing this bailout, then voters will pick losers this November. Stay tuned.


Dave Hoggan said...
This comment has been removed by the author.
Mike said...

Now why can't we have more Representatives like her rather than idiots like Barney Frank and crooks like Bush & Co. All bought and paid for by Wall Street and Big Money...

See couple of her short speech here..

wimpyVO2max said...

You complain the bailout contains nothing that forces banks to lend. An edict forcing lending is unworkable and thankfully not required. The other component to the bailout, not in the bill but soon to follow, are tougher lending standards (e.g., no liar loans, creditworthiness, etc.). Once good lending practices are restored, banks will trust each other again because they'll know everyone is writing good paper.

Political opposition to the bailout is ill-advised and ill-considered populism. The Great Depression started with the stock market crash but it was the drying up of liquidity and credit that killed the economy. The TARP bailout isn't perfect but it is far better than doing nothing. The bailout has the effect of bailing out both Wall Street and Main Street.

I don't see the justice in voting against the legislators who have been forced into putting this emergency mega band aid together. Instead, I'll just vote against the administration that allowed the mess to fester in the first place. McCain shares Bush's spirit of deregulation so I'll be voting for Sen. Obama.

DrDoom said...

Once again I don't follow why this bail out plan is a bad idea. For example the complaint that

This plan contains no requirement that forces the banks to lend.

Seems odd. Force a bank to lend? I shutter at idea that a bank would be forced to lend against the recommendation of the loan officer, the lending committee, etc. etc. The problem in the past was some (not all) banks being too easy. Now banks are failing with a record breaking collapse every week. Credit is harder to get every day. But force a bank to lend?

We need to enable banks to lend not force them. Return on investment from a prudent risk benefit analysis needs to be the motive for banks (but with better industry oversight and regulation).

There is so much missing information on what the bad debt situation is I find it hard to know if this bailout is good or bad. I tend to not trust the "do nothing / let them fail side" that does not advance a specific alternative or explain why letting failures continue for lack of credit will maximize benefit for society. It is easy to critize. It is hard to create.

Do you have a better specific reason why this bailout is such a bad move?

Patient Renter said...

DrDoom: For one thing, there's this, which Dean Baker pointed out this morning:

"the bailout has no serious restrictions on CEO pay. It has weak provisions that limit the tax deductions for very narrow categories of executive"

Patient Renter said...

One more comment on Dean Baker and why the bailout might not be a good thing. As Dean's opinion goes, he believes that a bank failure would not be the catastrophe that we're being made to think it will be. (Keep in mind, these are the same PTB that had us believe not going in to Iraq would result in a mushroom cloud. Exaggeration is their game). You can read a bit more on Dean's thinking, but this quote says it all:

"In other words, the banks have a gun pointed to their heads and are threatening to pull the trigger unless we hand them $700 billion."

We don't negotiate with terrorists, why should we negotiate with financial terrorists?

Max said...

Seems odd. Force a bank to lend?

But that's the rational for the bill, right? Banks aren't lending to "credit worthy" borrowers because of all the Level 3 paper. Buy the paper, give the banks money, and they will lend.

But there's no guarantee they will lend. They could horde the money. They could buy T-bills with it. Is it worth risking $700B+ of taxpayer money on a maybe?

Max said...

Do you have a better specific reason why this bailout is such a bad move?

There's been so much ink spilled on why this is a bad idea, I won't repeat them here. Check Roubini, Yves Smith, Calculated Risk etc. for specifics.

DrDoom said...

Hmmm. No convincing arguements here yet.

The idea of capping CEO pay for failing firms is attractive (and popular) but congress can not just break contracts (darn constitution). So if a rescue is needed (still an if. No good data yet.) cluttering the legislation up with CEO reform sounds like a mess. I don't think the bill is bad just because CEO's are overpaid.

Is 700 billion about right? Fed New York reports 2,919,604 subprime loans at average $183,917 per loan. If 50% fail at a 50% loss then size of loss would be 134 billion. The reported AlT-A's are slightly less at 2,259,502 with an average loan of $321,572. Once again half failing at a 50% loss would put coming ALT-A problem in the 181 billion range. This probably over states the subprime and ALT-A issue but since troubled loans can not be easily isolated contamination could spread x2 to x10. (Sure would like to see better data here).

Starting with 250 billion now plus 100B plus another 350B looks about right.

I don't know about Paulson. Can he do the job right? Is he properly motivated? It is the same question for the Fed Reserve.

I checked Calculate Risk quickly. I don't normally follow that blog. The opinion there seems to be moving in favor of the bill.

So once again, other than what my high school history teacher said

"Children, Never trust a banker"

What are the reason you are so sure this bill is so bad that anyone supporting it should be turned out of office? Clearly the bill is better than what came over from the White House with added oversight, transparency, control, auditing. Are you sure congressional support and work on this bill is the problem?

Mike said...

There are many many reasons why this bailout is a bad idea.

But, one thing I don't get is why suddenly people (including congress) are so easily duped by the Paulson, Bernake, and Bush. These three are same people up until just a couple months ago kept insisting that everything was just fine and there was no problem in economy and financial sector.

So, suddenly they are now saying there is a BIG crisis and we need tax payer to bailout Wall Street. I would not trust anything these three say, they have been clearly wrong (or clearly been lying) for the last few years about the economy and financial sectors. Why would I suddenly trust their words when they say Sky is falling now?

Instead, both Paulson and Bernake should be fired immediately for not doing their jobs.

Patient Renter said...

Wow. Wow. As I'm sure you all know, the bailout failed in the house. DOW plunged 700 points.

Deflationary Jane said...

I follow Calcuated Risk religously. Very few were in favor of the bill as it stood during that last vote.

Artifically inflating assests without wage increases (by whatever means, pick your poison) meant this would do bubkus for Main Street. That's what law makers are responding too - rightly so.