Bailout Conditions: Ending Welfare as We Know it Now
Like many other economists I have been writing about the conditions under which the taxpayers should be willing to hand over vast sums to the Wall Street wrecking crew. This is inevitably involves a game of chicken to some extent. But a properly designed bailout turns it into a simple question of revealed preference.
We give Wall Street terms that require giving up so much equity that the banks really don't want to take the deal. They will take the deal because they have to take the deal, the alternative is bankruptcy.
There is a very simple way to determine whether the deal is the right deal.
If the deal is the right deal, the stock market should rally; the threat of a financial meltdown will be pushed back, if not eliminated. However, if it's the right deal the financial stocks will not rally, they might even plummet.
The right deal will not give the shareholders anything. It will require the banks to surrender so much equity in exchange for their bailout that the share price could fall when the bailout is announced. After all, the shareholders of AIG were not happy when the Fed stepped in and keep the giant insurer operating. If we get the right deal, the stockholders of the surviving financial companies should be almost as unhappy.
So, there you have it. The right deal means stock market up, financial stocks down. Or to put another way, no deal until we see the "For Sale" signs in the Hamptons.
By the time we find out that the "deal is the right deal," -- or not -- it'll all be over.
Dodd will have his DSCC contributions from Wall Street, and Frank will be doing his St. Francis impersonation, hard at work bailing out mortgagors at taxpayer expense -- all in obfuscatory secrecy.
September 27, 2008 1:23 PM | Reply | Permalink
Ellen, I'd be very interested to read an overview from you. What's your take on the status quo? What, if anything, should be done at the Federal level? Anyhow, if you have the time and inclination, I'd love to read it.
September 27, 2008 4:41 PM | Reply | Permalink
The quick answer is that the question -- which has been forced precipitously on all of us by Paulson and Bernanke -- is objectionable for being improper. It assumes a fact not in evidence -- namely, that there is a problem which requires not "federal" but statutory action.
Until Paulson and Bernanke testify credibly that 1) a financial "meltdown" is threatened and 2) that they are without the tools to prevent it -- and in my view they have done neither* -- the question should not be allowed.
A question that is not allowed does not call for an answer. And without an answer no legislative action can or should be taken, and the ball is back in P&B's court.
* Others, of course, may disagree with my judgment.
September 27, 2008 5:17 PM | Reply | Permalink
a problem which requires... statutory action.
The Fed exhausted its balance sheet on AIG et sequellae, hence the need to bump the ceiling on the national debt.
You can't run the press (ain't it smokin' these days?) without you raise the debt limit.
September 28, 2008 4:35 AM | Reply | Permalink
I tend to agree with your observation. But it really is just a guess; Paulson and Bernanke, to my knowledge, have never said they're near (nearing) their limits. And --
Do we know that Treasury doesn't have the ability to recapitalize the Fed's balance sheet under current law? I sure don't.
September 28, 2008 1:59 PM | Reply | Permalink
I've done portfolio due diligence before. Looked at about 50 commercial mortgages a day; I've also audited bank loan files (mortgage and other) before loan review came to our bank. In both cases we did a database with basic borrower information (debt coverage, appraised value, credit score, repayment history, etc.) and risk rated the files.
Basic math - 3 million mortgages in the foreclosure process, 50 loans a day, a two week deadline (10 working days), you'd need about 6,000 people. Pay them $20 an hour and it costs about $10 million, rounding up. That's pretty cheap to have some real data about the mortgage assets to be purchased in this bailout, assuming they are the underlying problem.
How about an executive order to the regulators and banks to get this done?
Not sure if a similar process can be done to trace the CDOs and CDS back to the originators or pools.
Ellen, I completely agree and dislike this "obfuscatory secrecy" you so correctly point out. Let's have some data, please.
September 27, 2008 2:12 PM | Reply | Permalink
Once I saw the proposed bills at the committee websites, it looked like a done deal except for the remaining theatrics. The closure and immediate sale of the branches of Washington Mutual was amazing. Bank closures are usually done Friday evening, depositers have access to at least the insured amount of their funds on Monday and the dismantling and sale follows. This was clearly all worked out by a handful of people. So much for transparency and oversight. I don't think we will be seeing any foreclosures in the Hamptons. These operators use other people's money and take their cut up front.
Where I live, the recent news was that home sales were up but the median prices were down 40%. The big drops, and the foreclosures, were in areas where a great deal of overbuilding occurred. That tends to be outside of developed urban areas, which have no land. Sales may be slow in prime areas but there is no real problem. People like to live in those areas and raise their children so there is little reason to sell. Rents are being driven up in some areas for obvious reasons.
Someone I know acted as a notary public on about 4,000 real estate transactions during the bubble. He's a sharp guy and understood the financial contents of the documents being signed as well as the basics of real estate. The deal was done when those papers where signed and he affixed his seal. While the percentages changed as the bubble expanded, he said that roughly 20% of the deals were solid, 40% would work out as long as the buyers did not run into hard times but the remainder had no chance of working. It was his impression that many people did not really understand the terms of the sub-prime loans. Some would ask him if it were a good deal.
The really solid deals were being made by modestly wealthy people who often owned a number of properties and were just taking advantage of low interest rates to increase their portfolios. The "probably will work out" deals were ordinary people buying their first home or trading up. The rest, for the most part, were people who did not know what they were doing and were being told that they were qualified and that everything would work out. Of course there were small time speculators in all that too but my impression was that the real problems were in areas where there was a good deal of overbuilding and a lot of pressure to get it off the developers books.
It's the bankers holding the bag that want the bail out. Locally there will be a lot of dislocation and local real estate markets sort everything out. A recession, which seems likely no matter what they do, will create real losses for those who would otherwise be okay and those who signed up for deals that could not possibly work did not have any equity to lose.
The loss from the bubble is going to occur. It's just a matter of who takes the financial loss and my guess is that one way or another it will be the middle class. At a ground level, there will be a lot of dislocation but eventually the properties will be occupied. The bubble has already burst. Losses at the ground level as far as property values go have already occurred. More suffering on the ground level will occur, of course, and, financial service workers will lose more jobs. JP Morgan can now shut down up to 5,000 WaMu branches where Morgan already has branches.
The dot.com bubble did the same thing in my area. Lots of localized dislocations and price distortions and all the human suffering that goes with that. They managed to spread that loss to investors because they used stock. The deal makers took their money out at the beginning.
September 27, 2008 3:22 PM | Reply | Permalink
Here’s food for thought. It has been discussed on CNN about how even after the bailout there’s a good possibility that interest rates will rise, ATM might not be available and all sorts of extra fees.
If that is the case WE THE PEOPLE , who are going to help the bankers, will receive mo mercy for our debts
To illustrate
Matthew 18:23-35 (New Living Translation)
23 “Therefore, the Kingdom of Heaven can be compared to a king who decided to bring his accounts up to date with servants who had borrowed money from him. 24 In the process, one of his debtors was brought in who owed him millions of dollars.[a] 25 He couldn’t pay, so his master ordered that he be sold—along with his wife, his children, and everything he owned—to pay the debt.
26 “But the man fell down before his master and begged him, ‘Please, be patient with me, and I will pay it all.’ 27 Then his master was filled with pity for him, and he released him and forgave his debt.
28 “But when the man left the king, he went to a fellow servant who owed him a few thousand dollars.[b] He grabbed him by the throat and demanded instant payment.
29 “His fellow servant fell down before him and begged for a little more time. ‘Be patient with me, and I will pay it,’ he pleaded. 30 But his creditor wouldn’t wait. He had the man arrested and put in prison until the debt could be paid in full.
31 “When some of the other servants saw this, they were very upset. They went to the king and told him everything that had happened. 32 Then the king called in the man he had forgiven and said, ‘You evil servant! I forgave you that tremendous debt because you pleaded with me. 33 Shouldn’t you have mercy on your fellow servant, just as I had mercy on you?’ 34 Then the angry king sent the man to prison to be tortured until he had paid his entire debt.
WHY DOES MY GOVERNMENT BAIL OUT THE WICKED, AND CORRUPT BANKER, BUT PLACES ME AT THE MERCY OF THE VERY ONES WHO WERE FORGIVEN, BUT NOW DEMANDS MORE FROM ME
Is there no way to help alleviate the middle class debt, allowing the people to afford the house payment? Maybe they could pay the government back at a reasonable rate? The credit card companies would be paid off now.
September 27, 2008 5:45 PM | Reply | Permalink
Can anyone tell me, How much money does it cost for Congressional Junkets?
I read somewhere the right wing takes a lot of Junkets to the Middle East.
Since McCain has been to so many places, have those trips been on the Taxpayers dime?
How many trips has McCain taken?
September 27, 2008 6:19 PM | Reply | Permalink
The Shock Doctrine by Naomi Klein was an eye opener for those who never really took the time to connect the dots as to how societies are molded and forged by their masters hand behind the shadows.
With regard to the bailout that will come even against the roars of 95% of the people, the time is short. To the millions of us who phoned, faxed, e-mailed and even demonstrated on the streets of New York and Washington this week, we will now know who votes for this financial atrocity and those who dared to stand with “we the people”. Washington now knows that we are not their brain dead minions, but to effect real change you have to go all the way.
When your Congressman or Senator comes back to his district you do have options. for those who vote for the bailout. You can tar and feather them, you can turn your back on them after you give them a piece of your mind, you can withhold any further campaign contributions and when that curtain closes behind you in the voting booth, you can remember who sold you and generations to come down the river.
This matter transcends political party and I can assure all as Ms. Klein has so expertly done, it will happen again and again unless we the people rise up and take back our government. In plain English, vote the bastards out of their cushy offices as they are truly the parasites of our society.
Send a clear message this Election Day, that we’re mad as hell and we’re not going to take it any more. Watch for the voting records of those who allow this to happen and vote them out regardless of party affiliation until we get people in office who will listen to the people and do the peoples work once again in Washington. If we fall to apathy now we are literally doomed. D.C. never thought we would even care, but millions of us did and come November 4th, consider this our D-Day and throw the bums out.
September 27, 2008 6:55 PM | Reply | Permalink
LaRouche: There IS a Plan B!
September 27 2008 (LPAC)--Lyndon LaRouche today reiterated that the trillion dollar taxpayers bailout scheme, being peddled by Hank Paulson, Barney Frank, Chris Dodd, et al. is doomed to fail. ``If the bailout is passed, this will not solve anything. It will trigger Weimar hyperinflation immediately, will bring down the whole banking system, and, contrary to Gordon Brown's fantasies, will not save the hopelessly bankrupt British banking system.''
LaRouche emphasized, ``However, as many people inside Washington and on Wall Street perfectly well know, there is a Plan B. Plan B is my three-step solution, which begins with bankruptcy reorganization, rather than hyperinflationary bailout. First, pass my Homeowners and Bank Protection Act (HBPA). This viable proposal has been out there since Sept. 2007, and everyone serious, who has studied it, knows it will work. Had Congress shown the guts to pass my HBPA in 2007, this crisis would have been averted, and we would have already been on the road to a new, viable international financial order.
``Second, Congress, in coordination with the Fed, must establish a two-tiered credit system. The Fed must immediately increase short-term rates to 4 percent, to send a clear signal that the U.S. government is behind a strong dollar. At the same time, Congress, using its Constitutional authority, must issue trillions of dollars in low-interest credit for earmarked infrastructure projects, in the vital interest of the nation. We need high-speed rail and maglev, nuclear power, water management, new hospitals, repairs on our bridges and roads. These kinds of projects should be financed through capital budgeting, authorized by Congress at 1-2 percent interest.''
LaRouche said, ``And at the same time, the United States, Russia, China and India must take the lead in convening a treaty conference to establish a new international financial system, based on fixed exchange rates, along the conceptual lines of what Franklin Roosevelt did in 1944 with the original Bretton Woods System. We can and must put the bankrupt current international financial system through bankruptcy reorganization, and launch, on a global scale, what I have proposed with the domestic capital investment in massive infrastructure.''
LaRouche noted that prominent Italian officials have voiced their support for the convening of such a New Bretton Woods conference, and Russian leaders, including President Medvedev and Prime Minister Putin, have voiced similar support, particularly if the United States takes the lead.
``So no one in good faith,'' LaRouche concluded, "can honestly claim that the current bailout scheme on the table of Paulson, Frank and Dodd is the only option. It is not the only option. It is the option of a dark age for civilization. My Plan B is available, is viable, and can and must be acted upon now. This week.''
http://www.larouchepac.com/news/2008/09/27/larouche-there-plan-b.html
September 27, 2008 8:06 PM | Reply | Permalink
I don't see banks balking at trading equity for bailout money. They're already doing that, at least with foreign govermental entities. Morgan Stanley was seriously considering giving 49% to the Chinese! Why would Wall Street tremble at giving a stake to the US government with whom they have a good eal more influence than they do over Beijing. GOP ideologues hate the idea because it's too close to socialism, but I don't think Wall Street minds at all as long as they get their money.
September 27, 2008 11:28 PM | Reply | Permalink
FDR called them Banksters. For about a generation after Roosevelt, bankers were pretty good people. The banks in the smaller towns were owned by the richer families, but they weren't filthy rich. Then we let all those small banks get gobbled up by conglomerates that were owned by people who got filthy rich. They are Banksters again. Good post Resistance. As that same book says, "money is the root of all sorts of evil."
September 27, 2008 11:32 PM | Reply | Permalink
On the Home Page of TPM
"Deal reached on financial markets bailout"
I don't know all the details yet, but when comments included in this article
"The money should help troubled lenders make new loans and keep credit lines open. The government would later try to sell the discounted loan packages at the best possible price"
September 28, 2008 4:00 AM | Reply | Permalink
(Something went wrong, and it posted prematurely when I tabbed)
continued from article above
"Also, the government would receive stock warrants in return for the bailout relief, giving taxpayers a chance to share in financial companies' future profits."
DOH!!
Of course they want in on this money maker. under the guise of helping the poor distrssed homeowner, the rest of the population and the distressed homeowner, are going to get hit with higher interest rates and bank fees.
So the taxpayer bails out the banks unprofitable ledger side, leaving intact the banks best revenue side CREDIT CARD FEES AND INTEREST RATES.
I guess the banks like the idea of dumping garbage onto the taxpayer but doesn't mind gouging the consumer(Taxpayer) and why not, with higher interest rates the banks should notice a substantial increase in their profits, and our magnanamous government thinks we're stupid enough not to see that WE THE PEOPLE just got ripped off by this Collusion
http://en.wikipedia.org/wiki/Collusion
Collusion is an agreement, usually secretive, which occurs between two or more persons to deceive, mislead, or defraud others of their legal rights, or to obtain an objective forbidden by law typically involving fraud or gaining an unfair advantage. It can involve "wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties."[1] All acts affected by collusion are considered void.[2]
In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market form of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion.
However, if firms collude to increase prices loss of sales is minimized as consumers lack alternative choices at lower prices. This benefits the colluding firms at the cost of efficiency to society.
OUR GOVERNMENT LEADERS JUST HANDED US OVER TO THE BANKING CARTEL. SELLING US OUT FOR THEIR 30 PIECES OF SILVER
September 28, 2008 4:21 AM | Reply | Permalink