One of the many outrageous elements of the bailout is that as far as I can tell, all those Wall Street guys who paid themselves millions of dollars in bonuses for pushing this garbage paper back and forth are going to be able to keep all that money and their houses in the Hamptons. I have no problem with people making money, but only if they are going to have to eat the downside risk too. And I'm including the 30 year old millionaires in this too, not just the kingpins (many who sucked their money out before the bubble burst). Its been remarked by many others, but what is going on looks like the kind of thing you'd see in Russia or some other crony capitalist country.
I understand that this is about preventing a liquidity crisis like that one that helped to cause and deepend the Great Depression, when bank failures resulted in drying up the very investment capital needed to reverse the economic slide. If there is a logic to this, I assume it is something like that. But it'd be nice if they'd find some way to make the bankers eat some of this loss.
One question I've been trying to figure out is what exactly the government is going to do with this paper. As I understand it, this has all come to a head because of the changes in accounting rules over the past few years which forces a more frequent updating of the valuation of assets. So in the past, the investment banks would have just held this paper on their balance sheets for an extended period of time until some of it got back into the money or was offset by other assets. Now, however, as I understand it, the day of reckoning occurs with greater immediacy, creating the crisis.
Functionally then, as I understand it, the government is going to essentially perform this function of holding the paper until some of it gets back into the money or rotates off the balance sheet.
Here's what I'm wondering though that I haven't been able to figure out (pointers appreciated for cogent discussions of this). Is there anything in the bailout proposal to prevent the following scenario. Investment bank sells its mortgages to the government. Government holds the mortgages until the emergency abates. Original sellers form a syndicate to buy back the paper that has value at a cheap price and then turns a profit off that. In other words, is there anything in the bailout that stops the bankers from making money both coming and going here--by getting the government to buy all the garbage now and then buying-back anything with upside value later? Who other than these same guys are going to be in a position to buy this stuff later?
I'm genuinely asking here--I haven't seen any discussion about this. It would be pretty gross if there is some way that they can make more money off this on the back end, but now that we know the way these guys operate my guess is that they are already figuring out how to turn this to their eventual advantage. If not this loophole, are there other obvious loopholes?
There is an old saying about the need to "save capitalism from the capitalists" and the close relationships between these big money operations like Wall Street and Fannie Mae on one hand, and the government on the other, is really quite revolting. It is infuriating that the when things are going good they jet around in their private planes but when things turn south they can get the government to bail them out on our nickle. Seriously, how about trying to find some way of making them throw a few million or billion into the pot for saving their hides?
If a bank chooses to, it can get the government to buy 49.999% of the equity by doing a stock split, but the new shares go to the government, which pays the firm, per share, the market value of the existing stock one week hence.
Now the firms have a bunch of new capital (isn't the problem that they are undercapitalized?) but they give up half their equity to do so. If they pay a dividend in the future, half their total payment goes to the government. If they buy back shares, half the buyback total goes to the government.
The idea that more frequent mark-to-market is the root of the problem is also too generous. No rule made banks create bizarre, highly-leveraged instruments out of mortgages, good or bad. The opportunity to rake huge fees and bonuses from this leverage, conducted with Other People's Money and, we see, backstopped by Uncle Sam. is the culprit. Sensible regulation would simply have prohibited some of these financial concoctions. The rating agencies that depend on being yes-men for repeat business also need a thorough regulatory makeover.
Think of it this way: there is already significant risk in these corporations and we don't know the true downside. If there were enough private investors to inject equity, at the current share price, they wouldnt need the government. If government IS going to step in, buying at the current share price creates moral hazard. So, sell now at 80% of the trading price, or we can wait and buy at an even lower price.
I don't know man. I hope they can't get through the Duty of Care/Business Judgment Rule/Duty of Loyalty standards. Or even if they can, I hope they spend the rest of their lives fighting off such lawsuits.
Let some corporate lawyer chime in.
As long as the line between government and private sector is blurred by the Fannies and Freddies, we have this hazard.
Maybe annual (or whatever frequency) randomization of the oversight would help the honest people stay honest.
No. This all came to a head because a number of banks made bad bets using borrowed money, nobody knows exactly how much each bank lost or is going to lose, and hence nobody (including other banks) is willing to lend to banks today. The changes in accounting rules were a sideshow.
So, a good way of doing this is to concentrate on the pay of Wall Street folks. Everyone can understand that, and rather than struggle with the details of a ocmplex situation, we can shrink it down to whatever level we can handle.
A few days ago a CNN reporter stood in front of the AIG buiding and rattled off stats on how much money was involved. The first question Anderson Cooper, acting as anchor, asked was, "How much was the CEO's severance package."
So, as this unfolds, let's see how many congressmen and senators rant on about private jets, million dollar bonuses, high rise condos, and fast cars. In fact, let's see how many times it's mentioned in the presidential debates.
Does anyone really want Paulson and Bernanke diddling with old pay checks from Wall Street?
Excellent question! I am afraid the banks will be paid more than the junk is worth now, and at some point in the future these same banks will buy the assets at a cheaper price, thus screwing the taxpayers at both ends. There will of course be campaign contributions from the banks to the politicians - sounds no better than a 3rd world banana republic.
Isn't this one of the things SOX regulations supposed to prevent? How in the world did the CEOs and CFOs sign off on their SEC filings showing positive balance sheets and then paying themselves fat compensation packages?
The govt (Justice Dept or the regulatory agencies) should go after the execs of all these companies to recover part of their compensation. The management and shareholders of these companies deserve to get hurt. It will depend on who will be in-charge of the RTC like entity and what kind of pressure the pols will exert to bestow favors to the banks.
If the bankers or whomever are able to make money in the future off of this debt, it pretty much means that the we've averted this crisis, and that is the explicit aim of the bailout, isn't it?
I would certainly like to diddle into the old paychecks on Wall Street. I am all for high exec compensation as long as they are adding value to the shareholders and compensation is tied to performance. Here there was no real value add, but they indicated (either cheated or miscalculated) their portfolios performed well (when that was not true) and pocketed high bonuses. If it is a private affair between them and their shareholders, I would say it is up to the Board of Directors (and shareholders) to hold management accountable. But since the taxpayers are taking a bath, I think it is the duty of the Govt.
I just can't get over the fact that the Fannie, Freddie gang paid off the pols on Capital Hill and got away with this grand theft, and now the investment banks are likely to repeat it!
The new onerous rules on personal bankruptcy. Compare and contrast.
Of course not. Low level functionaries can do that. And recent law school grads working at relatively low pay can keep them and their assets tied up in court for years. At the same time, the SEC can impose lifetime bans on the whole lot of them. They can all be replaced. And the ones who signed off on fraudulent statements the past few years can join the ones who prepared them in the dock in criminal court. Cells at Guantanamo are available.
In other news, Barclays has reportedly set aside $2.5 billion for severance payments to Lehman employees. I've known a few people who had the misfortune of working for a company that went bankrupt. No one paid them severance. Some never even got their final paycheck.
A vast amount of the capital owned by individuals is managed by money fund and other managers. These people are not compensated for making prudent long term investments in the best interests of the owners - rather they are compensated in the short term.
Likewise, executives are chosen, ultimately, by these same fiduciaries through their voting share.
The result - looting that has nothing to do with government action.
Source.
Well, of course. People who are able to figure out how to make money should be able to keep their money. If trading garbage paper and getting the govt to pay for it is a viable way to make money, that's what people will do. Blame the politicians, not the bankers.
Folks are saying that the bailout is necessary because the economy depends on credit. The economy depends even more on the fact that people who make good investments making money, and people who make bad investments losing money. Whatever the consequences of not doing the bailout, it can't be worse that having folks creating situations where they need trillion bailouts every few years. That's why we need to nix this.
There are a bunch of mortgage fraud task forces around the country, in various states, and they've been going after some of the low-hanging fruit on the origination end, but I wonder if anyone on the securities side of this is going to get hung out to dry.
Yes I think the problem with this whole bailout is that the people who made it happen won't suffer and for the most part, neither will their organizations, Lehman, Bear and AIG excepted. Meanwhile taxpayers are being asked to absorb the bailout cost when we got none of the upside in the past, and probably will get none of the upside in the future. And the worst part of this is that we have no idea whether it will even work -- none of the solutions proposed by Bernanke/Paulson have worked yet to stabilize things, and we have already gone hundreds of billions into the red to try them.
As a side note, I am bemused to see so many conservatives looking the other way at a potential government takeover of Wall Street when they have previously opposed greater government involvement in the health care sector so vociferously. If greater government involvement (a/k/a 'takeover') of 1/6th of the economy was so bad, doesn't it follow that a takeover of the financial sector is even worse? I don't know the fraction, but I am guessing that the financial sector of the economy is at least equal to 1/6th of the economy, and there isn't even an argument here that the government ends up paying for all healthcare in the end anyway -- through medicaid, when the uninsured patient is seriously ill or dying and healthcare is most expensive -- so we might as well provide it when it is cheaper and more effective.
It would be nice to see the candidates take a position on the bailout -- perhaps even lead with a better solution -- rather than stick to their stump speeches.
Sigh.
One particularly "revolting" example: Robert Steel was recently appointed President and CEO of Wachovia -- a bank whose stock, until the government largess was announced, was in free fall.
Steel (who engineered Duke's complicity in the Lacrosse hoax) was Treasury Under Secretary. "Under" who? Paulson.
Both Steel and Paulson were executives at Goldman.
(Because somebody had to say it.)
Then you haven't been reading the conservative blogs. There's quite a bit of dishing on this, especially since so many Democrats and Democrat-connected supporters are in the mix on this. Jim Johnson, Franklin Raines, Jamie Gorelick, Chris Dodd, Barack Obama (the latter two got lots of Fannie Mae/Freddie Mac money) to name a few. And a lot of outrage that the American taxpayer is having to foot the bill for this.
I wonder where the liberals are, why isn't there more outrage over the fact that all these tax dollars we're going to spend bailing out the banks could be used to pay for after school programs and home health?
But really neither party has the high ground on this. Both Democrats and Republicans are culpable. And I also think that neither liberals nor conservatives believe that this is a proper use of American tax dollars or that it should ever have been allowed to come to this. It's really not a fault line issue in that regard.
The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset."
But what if the buybacks were mandatory - to have their debts absorbed by the fed, banks must pledge to buy back within a set period of time (say ten years) some dollar amount that is based on the amount of loans that the fed rescued? Sure, there would be lots of cherry picking, but at least this way, the banks would be on the hook for risks in the future, as they should be.
My other question is who is the government going to rely on for valuations? Anyone who is capable of valuing these debts is undoubtedly making a mint on Wall Street already. Who can we trust to make neutral evaluations?
Meanwhile, out of all the university professors who claimed that the Rosenbergs were innocent, or dished out similar Stalinist nonsense, not a single one lost his job. You can't lose your job as a professor no matter how stupid or evil you are. So I doubt that anyone will be running to the academy for ideas about accountability.
You can be sure that there are a lot of money people who are going to be the winners out of all this, to the disadvantage of the rest of us.
If the federal intervention is really important to the economy, then the views and bank balances of CEOs don't matter anymore than those of the guy in the mailroom. As I said, people will gravitate to dealing with what they are capable of understanding.
you dont seem to be factoring in moral hazard. the ceo's are the ones who took these risks and they are not paying the price..so it gives them no incentive to not be reckless.
in contrast-if the ceo's have to contribute-then there is a future president set that there will be some consequences.
in the typical golden parachute case-the ceo has still has an incentive to not act recklessly as if his company looses or goes bankrupt he looses all the equity he has in stock-so even wiht his golden parachute he comes out a loser. in this case-the stock equity they own will not suffer...hence the moral hazard.
it may be true that this really is a good idea. but honestly-if that was true than why didn't the treasury secretary think of this before freddie and fanny and leahman went under? wasn't it only last week when the treasury assured us that using taxpayer money to rescue lahman was a bad idea...what changed in 1 week?
finally while its true that many people dont see it this way and are as you say-translating a complex situation into one they can understand-that observation itself is only part of the picture as well.
The plan carries a huge price tag, and it is not something that would be done (or approved by Congress) uneless it is out of absolute necessity. Nor does the government have the need or desire to rescue every failing company. At the end of the day, Lehman's biggest fault may have been its size. It was not as big as Freddie, Fannie and AIG -- and as a result, the financial markets could better survive its destruction.
When Paulson finally pulled the trigger to propose the bailout, he was responding to what was becoming a historic collapse in the financial markets. Even money market funds were coming under pressure, and the redemption of those funds resulted in the newsmaking closure of the Putnam money market fund on Sept. 18, (link), and
other funds putting temporary freezes on redemptions. In other words, what changed of the last week before the bailout is that things got much worse.
If not, how is replacing a $100,000 (today market value) mortgage with $100,000 cash going to help? Is removing the downside risk and the upside benefit expected to not a gain? And when we sell those mortgages, won't we cause the same problem introducing them in the first place did?
And what happens when the government has to foreclose? Is it going to own a bunch of houses? Will it maintain them? Sell them?
I just don't get it. As I see it, the administration seems to be exploiting a crisis for a huge chunk of money to do with as it pleases. I see no evidence this will help ease the crisis -- just give us a lot less money and a lot more debt.
The "masters of the universe" who ran wall street finance have already made their $$$$, and stand to gain under the worst aspects of the Paulson plan.
Against them, there are many American businessmen who arent making their money from wild speculation, but from inventing, making, and selling things that people want: why should they be punished?
After the meltdown, we will see the financial industry contract as a % of GDP and maybe continued slow growth in that sector. We will need other sectors to grow more if we are to grow the economy. Taxing the hell out of them is not going to do it.
The only reason that "mark to market" produced 0 is that the allowed buyers got skittish. However, there are lots of people who would have been thrilled to buy those securitized loans at the right price.
Think about it. Wouldn't you (personally) have been willing to pay $0.1-20 on the dollar for any of those loan packages? We're not going to see 50% forclosure rates and even if we do, we're not going to see a 70% drop in housing prices.
* No one outside the banking, insurance, investment and finance system drew up the plans
* The real discussions, plans and debate are behind closed doors and there are no minutes. The debate is not about consensus building, but resolving a condition that THEY created and taking it to the next level of a single unified and internal trade and monetary system. By using the Shock Doctrine bankers have manufactured consent - The doctrine was created with the intention of being able to push through these unpopular reforms in the wake of the crisis.
* The man overseeing the bailout is the ex-CEO of Goldman Sachs, a Wall Street Company. He helped cause the crisis.
* Paulson helped obtain the SEC exemption which allowed brokerages to increase leverage to 60:1 from 12:1.
* The money is Paulson's to use for buying commercial and residential mortgages and mortgaged backed securities as he chooses. No one has any oversight over him, and he can pay any price he wants to, including face amount of the debt.
* Courts cannot review his decisions, not can any regulators. He has to report to Congress once every six months.
* He gets 700 Billion dollars to use as he sees fit, looking after the taxpayer is a "consideration" not a requirement.
* Do not worry your head off about the next domestic spending budget as you know a lot of the money has already being spent either now for the War over there, the War at home, the cost of keeping the government running and for every disaster we have had since Katrina. So forget all of those plans plans Obama and McCain are making about helping hard working Americans and cripples - all must wait in line to pay China and bankers.
Enron- Give a full proctological of all SEC reporting signed by officers of corporations and including the payment of bonuses to the Fannie/Freddie Mac folks. Maybe freeze some assets beforehand so Jamie Gorelick can't lawyer up. Where is Janet Reno when you need her (Dear Lord, I never thought I would type that sentence).
Superfund- Any entity owned or transfered these assets is on the hook for the costs of the cleanup. Can we extend that to politicians who received "grease" from a financial entity.
On the other hand, IF this fiasco is largely a result of the "Mark-to-market" accounting regulations introduced after Enron, as I have read repeatedly in the WSJ in the last several weeks, then it is a case of the government causing a problem and then "solving" the problem by arrogating more powerto itself.
I would have at least tried rescinding the "mark-to'market" rules before creating some Leviathan to buy up "bad assets."
Take one example. The CEO of AIG had been in that position 3 months. He is now fired. Who cares about either his bank balance or his views on moral harards? He doesn't matter.
BTW, Mr. Frank just pushed through his committee legislation to reinstate seller-provided down payments on federally backed loans, never mind that those were some of the biggest indicators of fraud (they turned many ostensibly 80% loans into 100% loans).
Nick