Much of the blogosphere is up in arms because of the provision in Senator Dodd’s financial bailout bill that might funnel profits from the bailout plan to ACORN Housing (related to the disreputable activist group ACORN), and other more reputable service organizations.
I have read Dodd’s proposed statute and in some respects, it is far worse than has been reported. Senator Dodd has placed a loophole in the bill that is explicitly designed to siphon off tens or hundreds of billions of dollars to the Housing Trust Fund and the Capital Magnet Fund even if there are no net profits in the $700 billion venture.
Here is the provision that has already been widely noted:
d) TRANSFER OF A PERCENTAGE OF PROFITS.-
(1) DEPOSITS.-Not less than 20 percent of any profit realized on the sale of each troubled asset purchased under this Act shall be deposited as provided in paragraph (2).
(2) USE OF DEPOSITS.-Of the amount referred to in paragraph (1)-
(A) 65 percent shall be deposited into the Housing Trust Fund established under section 1338 of the Federal Housing Enterprises Regulatory Reform Act of 1992 (12 U.S.C. 4568); and
(B) 35 percent shall be deposited into the Capital Magnet Fund established under section 1339 of that Act (12 U.S.C. 4569).
(3) REMAINDER DEPOSITED IN THE TREASURY.-All amounts remaining after payments under paragraph (1) shall be paid into the General Fund of the Treasury for reduction of the public debt.
The biggest problem here is that the 20% is not taken from net profits, but rather from any profit in the sale of each and every individual troubled asset.
For example, assume that the new Agency buys three troubled assets for $1 million each. One is sold for $2 million, while the other two are sold for $300,000. Thus, $3 million in investments are sold for $2.6 million, representing a $400,000 loss.
But Senator Dodd’s bill does not provide for losses to offset gains: “Not less than 20 percent of any profit realized on the sale of each troubled asset” must be given to the two housing funds, so $200,000 of the $1 million profit on the one asset that made a profit must be siphoned off to the housing funds, despite the $400,000 net loss on the three deals taken together.
As an analogy, imagine a regular trader of stocks who takes lots of hedged positions and had net losses of 25% this year, but couldn’t offset his gains with his losses, instead having to pay 15% income taxes only on his gains.
How much might be siphoned off under the Dodd bill? It all depends on how long the new credit Agency is in force, how often it turns over its portfolio, and how variable its returns are.
If the agency is in force for 4 years and turns over its portfolio every two months, then it would generate about $15 trillion in sales overall (650 billion x 6 x 4 = 15.6 trillion).
Let’s assume that $7 trillion of sales generate a profit of $2 trillion and $8 trillion of sales generate a loss of $2.1 trillion, leaving a net loss of about $100 billion.
With a net loss, one might think that nothing would be funneled to the housing funds for service organizations, but that is not what the statute says or means. One looks only at the sales generating gains to determine the size of the payments to the housing funds. With $2 trillion in profits and $2.1 trillion in losses, the housing funds nonetheless get $400 billion dollars in “profits.” (This is over 40% of a typical year’s US total federal income tax receipts.) And that is the result if only 20% of "profits" are skimmed; the statute puts no upper limit on the skimming, so long as they come from profits (not net profits). Theoretically, the new Agency could potentially siphon off $2 trillion to the two housing funds, more than its $700 billion portfolio limit.
400 billion dollars may be a high estimate for the housing fund payments, but if they turn out to be only a tenth as large ($40 billion), they would still be huge. To reduce this massive skimming required by the Dodd statute, the new government Agency would have the incentive to engage in fewer transactions and do less to create a public market for troubled assets, thus significantly undercutting the chance that the bailout will work.
I was mildly in favor of the bailout until I read Dodd's proposed statute. The way that the statute is drafted is so tricky and its definition of profit is so unsophisticated and nonsensical that the statute smells more of graft than of an honest attempt to solve the financial crisis. We are moving from failed "crony capitalism" to failed "crony community organizing."
Other posts will deal with other provisions in the Dodd bill and whether ACORN Housing will actually apply for any funding.
Related Posts (on one page):
- From Crony Capitalism to Crony Community Organizing: "Profit” Loophole in Bailout Bill Doesn’t Require Net Profits.
- Incentive Problems in the Dodd Bailout Bill.
As a practical matter, even if this bill was passed as drafted, it would necessarily be re-drafted when none of the banks (except possibly some with little or no net worth) were willing to play. No bank lawyer with a pulse would overlook these problems. Which would then bring the ACORN provisions into higher public relief, presumably causing embarrassment and appropriate re-drafting.
The point is that only an idiot would try to hide that ACORN provision in a document with so many other holes. It's like trying to smuggle drugs in a car with no license plate, and that's billowing black smoke. The alternative, that all the errors were unintentional, isn't exactly flattering, but at least it's consistent. Assuming the drafters were smart enough to cook up the diversion, but too stupid to execute it well enough to avoid inevitable exposure isn't impossible, but it seems more cynical than sensible.
You're being much too generous. If we didn't have an abundance of idiots we wouldn't have gotten into this mess in the first place. But let's keep our eye on the ball-- 100% of the profits should be returned to the taxpayers. Why should anything go to the Housing Trust Fund and the Capital Magnet Fund? Moreover outfits like ACORN are part of the root causes of the lax underwriting standards to have led to the entire subprime mortgage problem. ACORN itself stands accused of voter fraud, and ACORN founder and chief organizer Wade Rathke hid his brother’s embezzlement of nearly $1 million dollars.
Most senators are at least smart enough to put themselves in a situation where getting caught doesn't land them in prison. That doesn't make their schemes less evil. It just means they don't care quite so much whether they get caught.
Why the big rush?? Things were much worse in the late '70's [double-digit stagflation, very high unemployment, etc.], but no bailout was provided.
The world didn't end. The economy adjusted. Now our GDP is 300% higher.
Why the rush to "bail out" people who made foolish misjudgements? Any bailout would be at the direct expense of already hard-bitten taxpayers. Enough! Let those who made foolish decisions pay.
The ultimate effect of shielding men from the effects of their folly is to fill the world with fools.
~Herbert Spencer
Thanks for your work helping to expose this conspiracy.
The reason Obama blew up and ended up engaging in an emotional shouting match at the president's recent meeting was due specifically to the fact that details of the plan had been leaked. Obama couldn't pull a fast one.
Obama lost the control he thought he had with the bill's secrecy, and as a result he threw such a major tantrum [when he saw that there was opposition to his pals at ACORN feeding at the public trough] that people goy up and walked out of the meeting -- and the president was on Obama's side on this issue.
Obama's "my way or the highway" attitude does not bode well for the country. It reeks of inexperience. And if he's willing to give away multi-$billions to his cronies as a mere senator, how much more would he shovel toward them as president?
The only reason to keep the details of this bailout secret is to hoodwink the taxpayers. The bailout proposal is a scam. Public transparency is the answer.
Their evidence consists entirely of asking ACORN officials if it's true, and taking them at their word that they wouldn't apply for the funds.
Fortunately for Justin, the word "gullible" is no longer listed in the dictionary.
Now it's "The bill gives money to ACORN!" except that it just sets aside money to help homeowners generally and the bill gives zero money to ACORN.
The GOP talking point on this is utterly dishonest and dishonorable. I expect such brainless pap from Michelle Malkin and Ann Coulter, but not at VC.
Um, you do realize that that is a question for which evidence isn't possible, right? Were you asking that question in good faith?
If there was a republican-sponsored amendment to the bill that was actually likely to be added, don't you think that would be news?
Northern Divide Grizzly Bear Project
Michelle Malkin
Hot Air
The Corner
Quote from Senator Lindsey Graham:
"And this deal that's on the table now is not a very good deal. Twenty percent of the money that should go to retire debt that will be created to solve this problem winds up in a housing organization called ACORN that is an absolute ill-run enterprise, and I can't believe we would take money away from debt retirement to put it in a housing program that doesn't work."
Be patient.
But (as I will show) if you take what is said at Salon at face value on ACORN, then you aren't thinking too clearly here.
The ACORN criticism seems to be a right-wing bogeyman. Very unsubstantiated.
So, do we have to wait 5 or 6 years with funds in a "lockbox" before the government can do anything with them? Maybe set it as "20% of any profit made in a fiscal year?"
"The GOP talking point on this is utterly dishonest and dishonorable. I expect such brainless pap from Michelle Malkin and Ann Coulter, but not at VC."
don't confuse comments with posts - surely there are people who believe your opinions are better suited at Kos rather than at VC.
You checked your tax returns? If "you" paid for something, you should check your checkbook, credit card statements or bank records - not tax returns. You also "helped" pay for the Iraq war, now don't oppose it! Sounds logical?
Right, because a sneering dismissiveness is a sure sign of probative, inside knowledge, knowledge that is not to be questioned.
Christopher Dodd is among the mother of all D.C. based, self-aggrandizing bullshitters and meta-bullshitters, yet we're to somehow forego a thoroughgoing skepticism applied to a $700,000,000,000 bailout plan advanced by the Barney Franks and Christopher Dodds of the world. Puhleeeeez, whether it's ACORN or some other set of parasitic groups who may benefit from misconceived aspects of such a bailout plan would make little if any difference.
By contrast, what, exactly? We're suppose to trust the Dodds and Franks of the world?
"That Republicans have significant bargaining power, notwithstanding their minority status, is testament to the deep unpopularity of the Democrats' bailout measure ..."
And from an excerpted Roll Call piece:
"Bachus said Republican presidential nominee Sen. John McCain (Ariz.) significantly helped GOP Members by returning to the Hill this week because his message was that “House Republicans are relevant” and “we’re not going to roll the House Republicans.”
"McCain has “turned the negotiations around” within 48 hours, he said."
A tipping point may have been reached, but at least a checks-and-balances principle is being applied in the process.
Hold to maturity and apply the the collections to reducing the national debt. Specifically towards the social security portion of the debt. In the interim the interest portion collected above and beyond the debt service required to float the buy out should be rolled in to the FDIC reserve account.
The Republicans should stand fast and not vote for any bill that is not short, sweet and straight to the point. Or the alternative proposal of the insurance plan they proposed. Otherwise let Pelosi and Reid pass the bill they want out in the open and take the blame for it.
If you compare this to a typical Vulture Capital deal, the Limited Partners, i.e. the taxpayers, are paying a 20% carried interest on only the gains, without calculating the losses. The key word here is "each". Billions of dollars will go into a complete black hole. No limited partner in their right mind would pay any carried interest on a deal like this until all the chips have been counted and all the good deals offset with all the bad deals.
The right deal for the taxpayer would be to use whatever proceeds are recovered to permanently shut down Fannie and Freddie so this kind of debacle is not permitted to happen again with taxpayer money.
All the Dems must have been licking their chops to get a "free" $100B for socialized housing that they NEVER could have passed through congress and the president.
Putting Dodd and Barney Frank in charge of this charade is like letting a kid who just burned down the house go play with matches in the rest of the neighborhood. Yikes!
The Salon piece consists of an ACORN representative, Brenda Muniz, making the claim that ACORN will not try to get its hands on any of the fund that would be created in the Dodd bill cited above.
Even if we choose to take Brenda Muniz at her word, the Salon piece does nothing to refute Jim's point. After I get robbed by the federal government, I don't really care whether Obama gives my money specifically to ACORN as opposed to some other group of aggrieved lefty communitiy activists, whose scheme is to pressure banks to make bad loans in the name of fostering "diversity". For all I care, Obama can use my stolen money to distribute cigarettes to homeless people in exchange for registering as Democrats, or for a nice state dinner for Ahmadinejad at the White House.
The criticism is not limited to ACORN. I guess you found it confusing when, in the very first sentence of the piece, Jim mentioned that the fund could go towards ACORN "and other more reputable service organizations."
Paulson Update [Rich Lowry]
Quick e-mail from friend following negotiations quickly (excuse typos):
So it looks like a deal is shaping up
Treasury purchases plus mbs insurance (cantor)
Strong oversight/taxpayer protection
Limits on executive comp
No liberal add-ons (acorn, bankruptcy judges, proxy access)
Govt equity stake likely to be scaled back or dropped. No staff-level enthusiam for it.
Limit on amount of first tranche of money (less than $700 billion)
This deal gets 100 house gop votes
09/27 02:15 PM
link
And then we can have another bailout five years from now. With the "profits" going to ACORN to pressure banks to....
Groundhog Day II: The Revenge of Greenspan.
GIVE ME A FREAKING BREAK!
Lenders like Countrywide set up shop in low-income minority neighborhoods, contracting with brokers to shop these risky loans, for which the brokers would earn commissions per. The brokers engaged in fraud, deceit and outright lies in order to make as many loans as possible. The banks were in this for the profit. No borrower bit off more than they could chew without being pressured by the BANKS to take that bite. Someone please point me to evidence implicating ACORN in these schemes.
Get a job..
First, Chris Dodd (Chair of the Senate Banking Committee) and Barney Frank (Chair of the House Financial Services Committee) are "up to their asses ... in this mess" because, well, they are CHAIRS of the freakin' committees charged with negotiating the bailout proposal and sending it to full Congressional bodies.
Second, you have no clue how this mortgage mess started. Did Fannie and Freddie "make" most of the risky loans at issue? No, commercial lenders did. Are (because you won't say it, you stupid bigot) black people responsible for borrowing more money than they could handle? Perhaps, but blacks do not comprise a majority of risky borrowers.
There's really nothing that can't be blamed on the poor, or minorities, or better yet both.
I saw a neat little bit of info about the CRA and this crises. The study was quite interesting -- it turns out there was a significant link between how exposed an institution was and how tightly regulated it was under CRA. Unfortunately, what the link showed was that the more tightly a bank was required to adhere to CRA, the less exposure it had to toxic debt and bad mortgages.
But don't let facts get in the way of blamin' darky.
And here I thought I would be the responsible party.
Is that written anywhere in the contract? 'Cause I must have missed it.
Make a legitimate point, Troll, or go back under your bridge where you belong.
Thanks for elevating the discourse.
And we have another winner!
And another.
As for Chris Dodd, at least the House had sense enough not to put Alcee Hastings in charge of the Intelligence Committee. The difference between his behavior and that of Duke Cunningham is one of degree, not of kind.
Barney Frank is just a wacky ideologue. How could anybody think that now was a good time to overturn a FHA prohibition on participation in loans involving seller-financed down payments (one of the biggest indicators of loan fraud)?
Nick
We're a great country despite your vile bigotry, certainly not because of it. Don't be confused by the fact that our greatness includes your Constitutional right to disseminate such hatred to your heart's content. It doesn't mean there's a speck of value to it.