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Paulson: Foreign Banks Can Use US Rescue Plan.
September 21, 2008 10:30 AM   Subscribe

Paulson: Foreign Banks Can Use US Rescue Plan. Treasury Fact Sheet, "broader eligibility" if Paulson decides. Pressure builds at Morgan, Goldman. You Decide (kinda), probably no one listens.
posted by wallstreet1929 (200 comments total) 7 users marked this as a favorite

 
One member of Congress is seriously pissed off. Will the Democrats realize quickly enough that this time they have the administration by the balls, and not the other way around?
posted by shadow vector at 10:35 AM on September 21, 2008 [10 favorites]


Can someone explain why it makes sense for the Fed to lend $180 billion to other central banks? I understand that the idea is to provide dollars for those banks to lend domestically, but why is that necessary or preferable to their lending money in their own currencies?
posted by enn at 10:45 AM on September 21, 2008


I understand that the idea is to provide dollars for those banks to lend domestically, but why is that necessary or preferable to their lending money in their own currencies?

I'm sure there's some financial reason or another, but from a political standpoint Euros are starting to supplant the USD as the stable currency of choice in many countries. The US needs to move dramatically lest everyone flee to Euros and not come back.
posted by tkolar at 10:52 AM on September 21, 2008


but why is that necessary or preferable to their lending money in their own currencies?

I can't cite this, but my theory is this: Other central banks don't have the same kind of latitude to effectively "print money", if only for the time being. (Part of it, I imagine, is that there are rules in place in those specific countries that prevent "printing money" because it would cause massive inflation.) The dollar is THE currency of the globe, and since we have a special place in the world's financial system, it behooves us, and the world, to temporarily lend to other countries to keep liquidity in the system. (Reminds me of all the loans we gave out post-WWII; sure it helped rebuild the world, but it also allowed the US to continue to sell its wares.)

We also (theoretically) have less of a chance of sparking massive dollar devaluation/inflation by lending this money out, since we are the currency of choice. Other currencies don't have that luxury.
posted by SeizeTheDay at 10:53 AM on September 21, 2008


No one wants to seem alarmist but isn't the probably outcome of all this massive inflation and a huge increase on the individual tax burden? This "rescue" plan only seems to work if the government compels mortgage holders to accept a lower price or the government buys them above the real market value.

Ideological associations aside I found this critical viewpoint both helpful in understanding in what's being proposed, and somewhat worrying.

It really looks to me like the individual tax payer is about to get screwed. Everyone's acting like this wasn't foreseen or foreseeable -- why?
posted by polyhedron at 10:53 AM on September 21, 2008 [13 favorites]


This bailout plan is like a joke. The Bailouts should work like the AIG bailout. The government got most of the equity at a really good price, so if AIG becomes profitable again (and hopefully it will) the government will collect most of the upside.

On the other hand, with this Paulson will just buy up all the garbage debt at whatever price he thinks is necessary in order to keep the institutions from failing, and that probably means paying more then they're worth. After all, if they paid the true value, the institutions would end up bankrupt.

So Paulson will just buy up all the garbage, and the stockholders will go on their merry way, owning all the upside. That's total bullshit.

And we're talking about $700 billion potentially erased from the U.S. treasury, money that can't go for health care, for rebuilding infrastructure, education, or anything else. On top of the $1T or who knows how much lost in Iraq when all the bills come due.

What a joke.
posted by delmoi at 10:53 AM on September 21, 2008 [17 favorites]


From shadow vector's link:
Nancy said she wanted to include the second "stimulus" package that the Bush Administration and congressional Republicans have blocked. I don't want to trade a $700 billion dollar giveaway to the most unsympathetic human beings on the planet for a few fucking bridges. I want reforms of the industry, and I want it to be as punitive as possible.
Too damn right. I'm still not yet quite clear why they have to be saved before they fail -- and why the managers that got them into this fucking state are allowed to keep their jobs. You default on the shitty mortgage you signed up for, you're out of the house. You go technically bankrupt for selling the shitty mortgage? Hey, have a trillion bucks!
posted by bonaldi at 10:54 AM on September 21, 2008 [10 favorites]


This bailout plan is like a joke.
What's frightening is no one has a better idea.

Euros are starting to supplant the USD as the stable currency of choice in many countries
Citation needed.
posted by Nelson at 10:56 AM on September 21, 2008


That is a fantastic write-up that you've linked to, polyhedron. Seriously great.
posted by SeizeTheDay at 10:58 AM on September 21, 2008


-Euros are starting to supplant the USD as the stable currency of choice in many countries

-Citation needed.


Central banks dump dollar for euro

posted by Marisa Stole the Precious Thing at 10:59 AM on September 21, 2008 [3 favorites]


And the other thing: If these guy were so smart and so well versed in the economy, why didn't the see this coming sooner? After all, if they had proposed this a month ago, we could have avoided (probably) the collapse of LEH and AIG, and we would have had the time to figure out exactly the most equitable distribution of liability, figure out at least some regulation to try to fix the underlying problem, and so on.

Instead, Paulson and the bush administration wait until the last moment, when everything is falling apart and then demand absolute authority to do whatever the hell they want with no oversight, no judicial review, no nothing. If Paulson wants to bail out his friends at Goldman Sachs (the company he used to be the CEO of) by buying their mortgages at face value, he can. There would be nothing preventing him from cutting sweet insider deals.
posted by delmoi at 11:00 AM on September 21, 2008 [2 favorites]


Everyone's acting like this wasn't foreseen or foreseeable -- why?

It was foreseeable, but any attempt to publically address the problem forthrightly would make the problem worse.

This situation and dynamics are entirely too complex for met to criticize any policy direction. One thing I'm pretty sure of though is that Wall Street was minutes away from a 1987-style collapse on Thursday.

This is going to be bad, 10X worse that RTC, about as bad as Iraq.

Think of this plan as "The Surge" in monetary policy if it helps, for that's the basic crisis-management framework that was used to get us here.
posted by troy at 11:00 AM on September 21, 2008


Will the Democrats realize quickly enough that this time they have the administration by the balls, and not the other way around?

My understanding is that the Democrats have realized that this is not a time to be partisan. When the ship is sinking, it's stupid to spend time arguing about who gets to wear the captain's hat.
posted by Class Goat at 11:01 AM on September 21, 2008 [3 favorites]


Also, will this logic be broadened to allow non-Americans to vote in the presidential elections? I mean, the rest of the world has as much at stake - if possibly more - as Americans do when it comes to who the next president will be. There will probably be a number of registered or registerable voters who don't exercise their democratic rights. Give their votes to those who wants them, then.
posted by Marisa Stole the Precious Thing at 11:02 AM on September 21, 2008 [2 favorites]


My understanding is that the Democrats have realized that this is not a time to be partisan. When the ship is sinking, it's stupid to spend time arguing about who gets to wear the captain's hat.

Not if the "captan's" plan is to fill all the lifeboats with treasure and and a handful of his cronies.
posted by delmoi at 11:03 AM on September 21, 2008 [16 favorites]


What's frightening is no one has a better idea.
Call their bluff? Let them fail and see if the money market actually does seize up. If it doesn't, and it turns out that we can exist without massively complicated financial chicanery being traded for unsustainable profit, all to the good. If it does stall, I wonder if the government itself could work out some way to use this $1 trillion to do essential lending. Now that the socialist handcuffs are off and everything.

It might even ask people if they can afford to repay them, too.
posted by bonaldi at 11:04 AM on September 21, 2008 [6 favorites]


Actually let me expand on that.

My understanding is that the Democrats have realized that this is not a time to be partisan. When the ship is sinking, it's stupid to spend time arguing about who gets to wear the captain's hat.

You have a situation where the guy with the captain's hat steers the boat into some rocks, then comes up with a plan to fill all the lifeboats with treasure and a few of his top lieutenants. This is actually a very good time to argue about who should "wear the hat" especially given the fact that many people warned the captain about the rocks and he had plenty of time to turn the boat around before it crashed.
posted by delmoi at 11:07 AM on September 21, 2008 [15 favorites]


What's frightening is no one has a better idea.

This is absurd. Lots of people have other ideas, including the one I outlined above: the government should take Equity in the companies it bails out, so that if they turn out to be profitable in the end, the taxpayers take the profits. In fact, it's likely that given the insanely low valuations of these companies over the past few weeks such a course of action would end up being profitable.

That's what the Fed did with AIG and most people found that deal at least close to fair (if overly punitive to the stockholders, who otherwise would probably have lost everything).
posted by delmoi at 11:11 AM on September 21, 2008 [8 favorites]


I've been using the words "robber barons" when talking about these banks. What else can you call people who receive a $2.5b bonus when their company fails?

[Quote:]
Staff at Lehman’s New York office who helped to cause the world’s biggest corporate bankruptcy are to share in a $2.5 billion bonanza.

The bonus, which has been described by London staff as a “scandal” has been pledged by Barclays Capital, the British-based bank that last week acquired Lehman’s American operation and took on 10,000 staff.

The $2.5 billion (£1.4 billion) pot, which has been ring-fenced as part of the acquisition, has caused huge resentment among the 5,000 staff in the firm’s European and Middle Eastern operations who are not guaranteed to be paid after this month. There are, however, hopes that half the jobs in Lehman’s Canary Wharf office could be saved today by either Barclays or Nomura. Bids are being submitted for its UK equities and investment-banking business.
The way Wall Street appears to welcome this rescue plan makes me believe they'll go on with "business as usual", with one difference: now they know for sure than when their plans fail (again), they go home rich and the government gets to give them another bailout.

Disgusting.
posted by DreamerFi at 11:12 AM on September 21, 2008 [4 favorites]


The current plan is to buy off the shittiest of the shitty, shitty debt that all these companies have at considerably more than it's really worth. Now, this isn't a terrible idea. Uncertainty is the enemy right now, and nothing is functioning because no one firm knows how badly any of the others are exposed. They're all afraid to move. If the government swoops in and offers to buy whatever the banks want to sell, it will bring all the crap to the top and give it an actual dollar value. It will also cause a great deal of money to evaporate into thin air.

It might actually work. It's also a complete and utter giveaway, and if Congress doesn't extract their pound of flesh for it and make it contingent on deep, meaningful regulation, then they're just useless.
posted by shadow vector at 11:14 AM on September 21, 2008 [2 favorites]


My understanding is that the Democrats have realized that this is not a time to be partisan

"Let's not argue over who killed who . . ."
posted by troy at 11:16 AM on September 21, 2008 [3 favorites]


One week since Brokergeddon and the fun continues.
posted by woodway at 11:16 AM on September 21, 2008


You have a situation where the guy with the captain's hat steers the boat into some rocks, then comes up with a plan to fill all the lifeboats with treasure and a few of his top lieutenants.

Yesterday the headline was something like "Bush asks for expanded powers." WTF? He has already demonstrated that he didn't have a good handle on the situation so we should give him more powers?
posted by drezdn at 11:18 AM on September 21, 2008 [2 favorites]


This is George Bush's FUCK YOU to Barack Obama's health care plan.

Let these fuckers burn. The world will be a much better place. I knew Paulson was selling snake oil this morning when he started peddling that same old bullshit "if we allow these big guys to fail it's going to hurt the family farmer and the small business man" What fucking family farmer? If there are any left they can get loans from a regional bank which all remain very strong. Let the big guys burn, let's see what happens. Sure it will hurt all of us like hell but the world will be a much better place for our children and grandchildren. This is OUR mistake let's not pass it off to the next generation. It's time to take our medicine and stop these pricks in their tracks.
posted by any major dude at 11:19 AM on September 21, 2008 [2 favorites]


There will probably be a number of registered or registerable voters who don't exercise their democratic rights. Give their votes to those who wants them, then.

What if you sell 'em and use that money to pay off (part) of the debt?
posted by rough ashlar at 11:21 AM on September 21, 2008 [1 favorite]


Since there is very little to hold up this bill from getting passed, should we be concerned about what riders might be attached?
posted by sswiller at 11:24 AM on September 21, 2008 [1 favorite]


Since it excludes them from any sort of oversight or control at all in their actions, I think that's the least of yr worries.
posted by bonaldi at 11:29 AM on September 21, 2008 [1 favorite]


There's so much attention on this issue right now around the world that leadership would be insane to let through the kind of riders you're suggesting. Probably v messy work going on behind doors, but by the time it hits the floor they'll want a clean vote, IMHO. Maybe someone from the Hill can weigh in.
posted by woodway at 11:31 AM on September 21, 2008


What if you sell 'em and use that money to pay off (part) of the debt?

Say, now you're on to something. Help pay down the debt, extend the whole concept of "what America does effects everybody so everybody gets a stake", and double our voter turn-out simultaneously.

This job is easy. I should run for president!
posted by Marisa Stole the Precious Thing at 11:32 AM on September 21, 2008


Ignoring that it is a revolving door to buy the crappiest crap in crapville at whatever price they choose.

Ignore the fact that the motherfuckers who screwed this up get their bonuses and paulson has threatened to block anything that cuts their golden parachutes.

Ignore the fact that Lehman is paying out 2.5 billion dollars in bonuses to the people who broke things and these bonuses are firewalled in the Barclay's buyouts.

We have a proposal that has this in the legalese -

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.


What the fuck is wrong with people? How are we having this discussion?


Bail these fuckers out the way the nordic countries did. Slash, Burn, Nationalize, clean up and release back into the wild. No billionaire is spared. Clean the mess, do the right thing. This is not a moneymaking opportunity.

I've seen a lot of shit over the past 8 years. I've gotten mad at a lot of things. I've thrown my hands up in despair at how screwed up stuff us.

9/11, Iraq, Taliban resurgent, Haliburton, Blackwater, Attorney General scandals, Supreme Court Justices, War Crimes, Guantanamo, Enron.

This takes the cake. Hands down, takes the absolute cake. With the rest, you could squint, turn your head and maybe, perchance, see their world view. See the justification even if you didn't agree with the means..

This one.. Way beyond that.

Words don't do it justice.
posted by Lord_Pall at 11:36 AM on September 21, 2008 [31 favorites]


If it does stall, I wonder if the government itself could work out some way to use this $1 trillion to do essential lending.

That seems a lot riskier. If you allow non-financial companies to start failing, unemployment will go way up and the pain will really start for the ordinary guy. The financial services industry will be long gone by this point, so $1 trillion is unlikely to be even nearly enough. The whole point of this plan is that the financial services industry is still basically functioning, so a strategically placed bailout will leave most non-financial business' ability to raise operating capital relatively uninterrupted.

Can someone explain why it makes sense for the Fed to lend $180 billion to other central banks?

I would guess it's to assure dollar liquidity so foreign financial institutions can borrow to meet dollar-denominated obligations to U.S. counterparties.

if Congress doesn't extract their pound of flesh for it and make it contingent on deep, meaningful regulation, then they're just useless.

I wouldn't be surprised if Congress doesn't actually have a proposal for meaningful, effective regulatory reform. I agree it's necessary, but it seems like we have a timing problem. The bailout needs to go forward relatively quickly, or the situation just keeps getting worse, but comprehensive regulatory reform takes time.
posted by Mr. President Dr. Steve Elvis America at 11:40 AM on September 21, 2008 [1 favorite]


Since there is very little to hold up this bill from getting passed, should we be concerned about what riders might be attached?

We ought to be worried about what riders won't get attached. In particular, extending unemployment insurance that bush vetoed a month or so (the so-called second-stimulus package).
posted by delmoi at 11:40 AM on September 21, 2008 [1 favorite]


Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

This is actually Constitutional, Congress has the authority to make its laws unreviewable.
posted by troy at 11:47 AM on September 21, 2008


"Government is the problem"
posted by matteo at 11:47 AM on September 21, 2008 [1 favorite]


The whole point of this plan is that the financial services industry is still basically functioning

Oh, thank goodness. Who cares about the patient as long as the tumor survives.
posted by fleetmouse at 11:48 AM on September 21, 2008 [13 favorites]


I wouldn't be surprised if Congress doesn't actually have a proposal for meaningful, effective regulatory reform. I agree it's necessary, but it seems like we have a timing problem. The bailout needs to go forward relatively quickly, or the situation just keeps getting worse, but comprehensive regulatory reform takes time.

Very possible, and exactly the kind of thing that the squishy moderates will use to talk themselves out of actually taking advantage of this moment. Congress should just pass the most ridiculous, overbearing set of regulations they can find a draft of. Kitchen sink. Surely Dennis Kucinich or Bernie Sanders have something on hand. It can always be dialed back next year once the dust has settled.
posted by shadow vector at 11:48 AM on September 21, 2008


Oh, thank goodness. Who cares about the patient as long as the tumor survives.

Hardly. In fact, a lot of the attitudes in this thread could be summed up as "who cares about the patient as long as the tumor dies."
posted by Mr. President Dr. Steve Elvis America at 11:50 AM on September 21, 2008 [1 favorite]


The financial services industry will be long gone by this point
I've seen this claim a lot, but usually from people who seem for some reason to like the idea of getting their hands on $700bn. It feels an awful like a loaded gun being held to the head of the American public: "We fucked up. Now save our industry, else the small businessman gets it". It's a ransom demand.

If you mean that an industry in complicated products based on the back of complicated products that made the traders rich will collapse, I'm not sure about the volume of tears that will be shed. It'll possibly be equal to all those shed by the workers of companies bought out by these pricks and handed "free-market efficiency" rhetoric with their buyout cheques.

Your bubble burst. Own the consequences.
posted by bonaldi at 11:54 AM on September 21, 2008 [6 favorites]


Congress should just pass the most ridiculous, overbearing set of regulations they can find a draft of. Kitchen sink.

What, now we're bailing out the legal services industry too?
posted by Mr. President Dr. Steve Elvis America at 11:56 AM on September 21, 2008


The thing that worries me most is that the "mainstream" media is not making any earnest attempt to comprehend or explain what is going on. We are in the vast minority in making any effort to understand and seeking alternative interpretations/solutions. The finance sector will get what they want, and it will be rushed through Congress before anyone reads the text of the legislation.

The majority will complacently take what they are fed, the rest of us will be left bitching on the internet. The truly rich will not suffer, the powerless will remain downtrodden.

I don't think there's ANY solution that will leave everyone happy. Heads should roll -- the only penance for these sins must be paid in blood. Whose will it be? I predict massive inflation will wreak unspoken tragedy across the remains of the middle class. I wish I could be more positive about it.

God bless America -- FUCK YEAH!
posted by polyhedron at 12:00 PM on September 21, 2008 [2 favorites]


If you mean that an industry in complicated products based on the back of complicated products that made the traders rich will collapse

No, that's not what I mean. Unfortunately, the risky, exotic businesses weren't sufficiently insulated from the plain vanilla insurance commercial and investment banking businesses. The point of these bailouts is to keep the insurance, lending, and capital markets businesses on which a huge number of "ordinary" companies rely functional.
posted by Mr. President Dr. Steve Elvis America at 12:05 PM on September 21, 2008


Be very afraid of a proposal by the Bush Administration that would allow administrative action to be immune from judicial review, unless you're looking forward to some quality time at Gitmo. This aspect of the bailout bill is a power grab by David Addington and the Friends of the Unitary Executive. It is reminiscent of the power claimed by Hitler in 1933--in an emergency, of course.

The proposed bailout will bankrupt the US for the sake of the globalistas. Paulson made that plain today. We are deeply in the throes (the last throes?) of a "Do something even if it is wrong" panic that will leave us all firmly under the sway of the Law of Unintended Consequences. Paying good money (even if borrowed) for worthless promises is a Bad Idea. Period.
posted by rdone at 12:08 PM on September 21, 2008


The point of these bailouts is to keep the insurance, lending, and capital markets businesses on which a huge number of "ordinary" companies rely functional.
Ostensibly, it is. But there is, and will continue to be, profit to be made in these markets. So surely once the dust settles the inevitable avarice will lead people to establish these markets again. Hopefully with slightly more stringent checks than "is breathing?" this time.

Isn't that how a market's supposed to work? And surely $700bn would go some way to ameliorate the period of dust-settling.
posted by bonaldi at 12:09 PM on September 21, 2008


The bailout needs to go forward relatively quickly, or the situation just keeps getting worse

And when this bailout doesn't stop 'the situation from getting worse' what then? More of the same failed thinking you've been pushing? How nice.

Remember:
The British government tried to fight George Soros and lost. The US will loose against the world betting against it.
posted by rough ashlar at 12:12 PM on September 21, 2008 [1 favorite]


Additionally, if said markets are so vital, that's a really good reason not to let the monkeys that swung their clever-clever way into this mess anywhere near them.
posted by bonaldi at 12:12 PM on September 21, 2008 [2 favorites]


I get that something has to be done, that these institutions are no doubt "too big to fail." I understand that.

What I don't get is how these "captains of industry" will not be punished. They just get to jump ship with a fat paycheck, then grab the nearest yacht and sail off into the sunset. Where do these guys come from? Probably the same place Exxon got the guy who steered the Valdez so poorly. There's a whole chain of decisions made and the responsibility just vanishes in the shuffle.

The people responsible ... you know how I hear people who are just helpless with rage over the archtypal (and apocryphal) welfare queen who does nothing but collect checks for all of her kids and drive her Caddy to the nail salon? That's how I feel about these morons. But the difference is that these welfare queens actually exist.
posted by adipocere at 12:13 PM on September 21, 2008 [7 favorites]


This is George Bush's FUCK YOU to Barack Obama's health care plan.

Then why is Obama supporting it?
posted by goethean at 12:14 PM on September 21, 2008


MPDSEA, isn't the problem that due to cheap money and masking debt through the use of exotic financial instruments, the economy grew at an unsustainable rate and a proper reevaluation and repricing of assets would deleverage every major financial institution to the point of default?

Isn't the only natural conclusion to this crisis the evaporation of >$1T in "real" dollars?
posted by polyhedron at 12:16 PM on September 21, 2008


In fact, a lot of the attitudes in this thread could be summed up as "who cares about the patient as long as the tumor dies."

no, the attitude of most rational people here is "we'll have to remove this tumor from the patients' lung, and we'll pay the hospital bill with a lot of money we don't have, but if she smokes another cigarette, ever, we're going to cut her fucking hand off, seriously. no more cigarettes, period, by court order". you, instead, are Mr. Steve Philip Morris President America. that's the difference.
posted by matteo at 12:16 PM on September 21, 2008 [7 favorites]


But there is, and will continue to be, profit to be made in these markets. So surely once the dust settles the inevitable avarice will lead people to establish these markets again.

Yes, of course. In the mean time, an unknown number of non-financial businesses will have failed due to an inability to raise operating capital. A lot of people will have lost their jobs and homes and gone bankrupt.

All of this, for what? To symbolically punish the offending institutions? I say symbolically because financial institutions aren't people, and can't actually be punished. The people who really oversaw all of this are walking away rich regardless of whether the institutions fail, so don't even think that's on the table.
posted by Mr. President Dr. Steve Elvis America at 12:17 PM on September 21, 2008


The people who really oversaw all of this are walking away rich regardless of whether the institutions fail, so don't even think that's on the table.

If I buy a mansion with the proceeds of illegal narcotics, the government doesn't have a single problem taking everything I own. Why is this situation any different?
posted by polyhedron at 12:20 PM on September 21, 2008 [8 favorites]


The people who really oversaw all of this are walking away rich regardless of whether the institutions fail, so don't even think that's on the table.
Rich people have gone to jail for less; and judging from the uproar that's brewing, they might trouble jails for this too. I haven't seen Americans so politically engaged in eons. If the smaller business do start to fail as well, the table might get bigger than you think.

Also: corporations can be sick; they can have bad cultures. Sometimes they do in fact need punished, just like the citizens they so often desire to be treated as.
posted by bonaldi at 12:21 PM on September 21, 2008 [2 favorites]


Of course, the Democrats will probably enact Paulson's wishlist before Friday as the GOP winds up the Wurlitzer and hammers them about it.

We have to pay for our overconsumption. We will pay for it.

You know, if I'm worried about the family farmer, the bus driver, the school teacher, I've got a better idea. Let's bail them out instead.
posted by eriko at 12:22 PM on September 21, 2008 [1 favorite]


For fuck's sake! The banks didn't break any laws. The executives didn't break any laws. They took risks and didn't look ahead. It's the regulators job to see this, and enact regulation to prevent collapse. The SEC, Fed, and various other regulatory bodies were asleep at the switch.
posted by SeizeTheDay at 12:23 PM on September 21, 2008



Of course, the Democrats will probably enact Paulson's wishlist before Friday as the GOP winds up the Wurlitzer and hammers them about it.


Don't you mean before tomorrow evening? You really think we'll get a whole media cycle to discuss this plan?
posted by polyhedron at 12:23 PM on September 21, 2008


IF you take a look at how much both the Dems and the Reubs got from banking, insurance et al sources for campaigns, and then realize what the lobbyists have also contributed, you will understand why there is a bi-partisan agreement to use your tax money to bail out these people...the bail out program is prepared by the same people who allowed the mess to take place.
posted by Postroad at 12:27 PM on September 21, 2008 [1 favorite]


They took risks and didn't look ahead.
Fair enough! But now they take the fall for those risks. They don't get to profit from the risk and escape the consequences of it going bad. And if they took so much of a risk that they apparently damaged the country to the tune of trillions, now they get to go to jail as well.

Holy shit, consequences for actions. Who'da thought?
posted by bonaldi at 12:28 PM on September 21, 2008 [10 favorites]


Sorry, I should add that engaging in off-balance sheet derivatives is not against the law. Lending to people who didn't deserve to be lent to isn't "technically" against the law. Securitizing and hedging isn't against the law. But a systemic deleveraging would collapse any of these systems. Regulators KNEW this, but kept silent, because they figured the banks knew what they were doing (and in some cases, encouraged it, like Greenspan did when he lowered rates to 1% and kept them there, or like this little nugget:

"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," Greenspan said.
posted by SeizeTheDay at 12:28 PM on September 21, 2008



For fuck's sake! The banks didn't break any laws. The executives didn't break any laws. They took risks and didn't look ahead. It's the regulators job to see this, and enact regulation to prevent collapse. The SEC, Fed, and various other regulatory bodies were asleep at the switch.


Where does the freakin' buck stop? Are you aware that the Fed is currently being run by the former chairman and CEO of Goldman Sachs? Are you so naive as to believe the eggheads and the executives were totally blindsided by this crisis, were unaware of the peril of their direction when they demanded enormous no-strings-attached compensation packages?

...the bail out program is prepared by the same people who allowed the mess to take place.

EXACTLY!
posted by polyhedron at 12:30 PM on September 21, 2008 [5 favorites]


The people who really oversaw all of this are walking away rich regardless of whether the institutions fail, so don't even think that's on the table.

Extracting the money from the overseers who are walking away rich could be done - but that would require actual change in Washington.

Such would be an affront to the 'rule of law' - but hey what's another affront?

(And when will the 'tax the war profiteers' posters of the Great War make a come back?)
posted by rough ashlar at 12:30 PM on September 21, 2008


My understanding is that the Democrats have realized that this is not a time to be partisan. When the ship is sinking, it's stupid to spend time arguing about who gets to wear the captain's hat.

disingenuous - we were already arguing about who was going to wear the captain's hat before the ship started sinking - that argument is called an election

and those tend to be partisan

and the democrats now have a plain opportunity to put a real choice in front of the american people - demand some help for the american people as well as the wall street bankers and dare the republicans to make the election about this issue

700 billion for the economic elites and nothing for the common people?

that's the way they need to frame this republican proposal
posted by pyramid termite at 12:31 PM on September 21, 2008 [1 favorite]


What we're looking at here is 9/11: the Financial Version, and the bailout is Patriot Act: the Financial Version.

If it goes forward as the Bush administration plans, it will amount to the final-- or from the most optimistic point of view, penultimate-- piece of the coup d'etat that began with the theft of the 2000 election.
posted by jamjam at 12:33 PM on September 21, 2008 [1 favorite]


There's an interesting VoxEU article just out:
The Paulson RTC will buy toxic assets at inflated prices thereby creating a charitable institution that provides welfare to the rich – at the taxpayers’ expense. If this subsidy is large enough, it will succeed in stopping the crisis. But, again, at what price?

The answer: billions of dollars in taxpayer money and, even worse, the violation of the fundamental capitalist principle that she who reaps the gains also bears the losses. Remember that in the Savings and Loan crisis, the government had to bail out those institutions because the deposits were federally insured. But in this case the government does not have do bail out the debtholders of Bear Sterns, AIG, or any of the other financial institutions that will benefit from the Paulson RTC.
...
Forcing a debt-for-equity swap or a debt-forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition. The appeal of the Paulson solution is that it taxes the many and benefits the few. Since the many (we, the taxpayers) are dispersed, we cannot put up a good fight in Capitol Hill. The financial industry is well represented at all the levels.
posted by TheophileEscargot at 12:34 PM on September 21, 2008


Fury at $2.5bn Lehman bonus:
...Staff at Lehman’s New York office who helped to cause the world’s biggest corporate bankruptcy are to share in a $2.5 billion bonanza. The bonus, which has been described by London staff as a “scandal” has been pledged by Barclays Capital, the British-based bank that last week acquired Lehman’s American operation and took on 10,000 staff.

The $2.5 billion (£1.4 billion) pot, which has been ring-fenced as part of the acquisition, has caused huge resentment among the 5,000 staff in the firm’s European and Middle Eastern operations who are not guaranteed to be paid after this month.

posted by ornate insect at 12:35 PM on September 21, 2008


Karl Denninger critiques Paulson's morning interview in The Mother of All Frauds--worth a listen, but will increase your blood pressure.
posted by wallstreet1929 at 12:35 PM on September 21, 2008 [1 favorite]


MPDSEA, isn't the problem that due to cheap money and masking debt through the use of exotic financial instruments, the economy grew at an unsustainable rate and a proper reevaluation and repricing of assets would deleverage every major financial institution to the point of default?

I don't think the real economy ever grew at an unsustainable rate. This bubble obviously grew at an unsustainable rate, though.

As for whether a proper revaluation would leave everyone insolvent, it's important to distinguish between different types of insolvency. There's insolvent in the sense of having liabilities in excess of assets, and there's insolvent in the sense of being unable to pay your liabilities on time.

A lot of the present problem, as I understand it, is that risky instruments were used as collateral or regulatory capital in ways they shouldn't have been. As the risky instruments were valued down, this required institutions to top up collateral and regulatory capital, but it became increasingly difficult to raise funds to do this, because the market became hesitant to value particular assets (which were unquestionably worth something) and there was a general loss of confidence that made it difficult to borrow.

I think the goal of the bailout is to put a value on these illiquid assets, allowing the extent of losses to be recognized, which in turn allows the identification of the good asset base against which the institution can borrow against to meet its day to day obligations.
posted by Mr. President Dr. Steve Elvis America at 12:37 PM on September 21, 2008


Listen, I get the anger, I do. But saying asinine things like putting executives in prison at a time like this is stupid. Really stupid. Because there were a great many moving parts to this ultimate demise. Democrats like Barney Frank who back in 2003-2004 thought that Fannie and Freddie should get bigger. Regulators like Greenspan who looked the other way as this credit bubble grew. Bush, who expanded our national debt to epic size (which has now hampered our ability to fix this problem, because foreign creditors are becoming wary of the dollar).

This is a lot more complicated than a couple of days at looking at CNBC, or Calculated Risk, or whatever place people get their news. Look into what's known as a liquidity trap. Look into what's known as "the paradox of deleveraging". Look at almost 15 years of Japanese economic stagnation (and what's interesting is that their economy actually produces stuff and exports, as opposed to our burger flipping, paper shuffling economy).

You can't just point the finger at Paulson or Bush or some Wall Street executives and think that that solves anything. This situation has dozens of moving parts and Paulson, Bush, and Wall Street are simply the easiest to point out.
posted by SeizeTheDay at 12:38 PM on September 21, 2008 [3 favorites]


I can't recall where I saw or heard this, but within the past few weeks somebody suggested that the republicans get into office and run up a huge deficit, then even if the democrats wrest control they are powerless to institute social programs because of it. It was suggested that this is exactly what happened to Clinton when he got elected, and the reason we don't have a national health care program today.
posted by SteveInMaine at 12:38 PM on September 21, 2008 [2 favorites]


Rich people have gone to jail for less; and judging from the uproar that's brewing, they might trouble jails for this too. I haven't seen Americans so politically engaged in eons. If the smaller business do start to fail as well, the table might get bigger than you think.

I should've been more clear. The individuals who oversaw the failing institutions may or may not face personal repercussions. I have to admit this question doesn't interest me. My point was simply that it's orthogonal to the structure of the bailout.
posted by Mr. President Dr. Steve Elvis America at 12:41 PM on September 21, 2008


Guys I'm not surprised at the reaction to Paulson's proposal, as presented. But I'm wondering what else we're missing?

Of course the knee jerk reaction is assume that Treasury's doors will be wide open, and banks will be dumping assets - overpriced assets on the US Government. Of course reading this at face value, that does indeed seem possible. But let's look closer:

"The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets."

I'm wondering where they're going with this one. What would these "other assets" constitute? Maybe some of this cash will be used for AIG style purchases? FWII, I agree with delmoi et al upthread about the AIG "purchase". Maybe Paulson does as well, but realises if he tries to push through a shopping list 1) he'd spook the markets further, and 2) he'd never be able to move fast enough as firms identified for culling would lobby - hard - against this bill.


"The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions."

Reverse auctions, of course, actually lead to lower prices, not higher as in traditional auctions. Effectively, sellers of a commodity compete to move said commodity to the buyer at the lowest possible price.


"Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets. "

Now this is interesting as well; this gives Paulson the mandate to do deals in foreign countries. We've already read that Paulson is trying to get the G7 onboard. I've got an idea (about the only thing anyone else in this thread does) but I'll post it a little further.


"Management and Disposition of the Assets."

This basically sets Paulson and Treasury up to manage this program into a Profit Centre, if they can get the assets cheap enough. Nobody can come back at them a year later, demanding compensation for assets bought "on the cheap" and sold dear.


"Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly."

Ok, this is clearly inflationary but I disagree with comments that it would be "massively inflationary". It's no doubt gonna drive some inflation into the system (unlike their actions to date which used existing money) but I can't quantify how much and I doubt anyone else can, with any reasonable degree of accuracy, at present.


Now what's my overall take on this?

Well, I think we'd all agree there is a regulatory problem. Multinational banks can't easily be controlled. Before the events of last week.

But get them when they're on their knees, when they need liquidity, Paulson can call the shots. He can demand pretty much any terms he'd like, and since there is a dearth of buyers for banks and banking assets these days, he'll get it.

I think in six months to one years time many the same banks will still be about (and some of the recently departed may in fact, resurrect) but they will be very, very heavily regulated. These regulations will be imposed, to no small extent, by the leverage this bill give Paulson / et al.

I've got to think about this some more, but I still believe we're not seeing much detail about how Paulson and his team will go about doing deals. I'm hoping they'll drive a hard bargain. We're certainly giving them all the tools necessary to straighten this mess out once and for all.
posted by Mutant at 12:41 PM on September 21, 2008 [5 favorites]


I don't think the real economy ever grew at an unsustainable rate.

Er, if it were sustainable would we be having this discussion? It wouldn't be a crisis of unspeakable dimension, the extent of which is only discussed in hushed meetings of the elite behind closed doors. I heard some asshats talking to George Stephanopoulus this morning and they refused to talk about how bad the problem is supposed to be. I think you're in a bit of denial.


I think the goal of the bailout is to put a value on these illiquid assets, allowing the extent of losses to be recognized, which in turn allows the identification of the good asset base against which the institution can borrow against to meet its day to day obligations.


I personally think the goal is the exact opposite -- the assets are illiquid because the holders won't accept their value not due to a lack of buyers. The goal of the bailout is to pay the owners what they feel their assets are worth, hiding the extent of the losses (through inflation and increased tax burden).
posted by polyhedron at 12:43 PM on September 21, 2008


Lord_Pall: What the fuck is wrong with people? How are we having this discussion?
Bail these fuckers out the way the nordic countries did. Slash, Burn, Nationalize, clean up and release back into the wild. No billionaire is spared. Clean the mess, do the right thing. This is not a moneymaking opportunity.


I'm pretty sure the people involved think it is.
posted by ArgentCorvid at 12:43 PM on September 21, 2008


How do we know that the amount of money in the bailout package will even be enough to cover the worst of the bad debt? There's zero transparency in the marketplace for these products. What if $700 billion later banks and insurance companies are still failing left and right? Bailout 2, Bailing Harder?
posted by The Straightener at 12:46 PM on September 21, 2008


Mr. President Dr. Steve Elvis America: this plan seems like a very radical, innovative new way to deal with a bailout.

If the wider economy needs these institutions to be bailed out, why not do in in the usual way? Nationalize them, take them over, make sure they can't keep doing risky business, then sell off the assets later.

This plan seems to involve buying their dubious assets at inflated prices, leaving the old guys in control, then just praying that they're not going to make the same mistake again... even though they now know they'll get bailed out if they do.

This seems like an awfully expensive experiment. You could buy over a hundred Large Hadron Colliders for that money, just for a start...
posted by TheophileEscargot at 12:49 PM on September 21, 2008 [3 favorites]


Fuck this, it's time to take back this country.

If there was ever a reason to rise up against these bastards, this is it. If we don't act, it's really, truly all over for us. As an American citizen, this is the straw that broke the camel's back. This the the big, bold final attempt to empty out the treasury, this is the economic final, fatal to break us all, those of us who work for a living, make things, instead of moving paper around and getting blood from the proverbial stone. There is no recovery from this one, if we let it happen.

It's all or nothing. What will you do?
posted by dbiedny at 12:49 PM on September 21, 2008 [4 favorites]


How do we know that the amount of money in the bailout package will even be enough to cover the worst of the bad debt? There's zero transparency in the marketplace for these products. What if $700 billion later banks and insurance companies are still failing left and right? Bailout 2, Bailing Harder?

We don't, and the proposed bill is for $700 billion at a time. It's basically an American Express Black Card for the finance industry, and the bill will be sent to us.
posted by polyhedron at 12:50 PM on September 21, 2008


Sorry for the typos, I'm just shaking mad over here.
posted by dbiedny at 12:50 PM on September 21, 2008


You can't just point the finger at Paulson or Bush or some Wall Street executives and think that that solves anything. This situation has dozens of moving parts and Paulson, Bush, and Wall Street are simply the easiest to point out.

I wondered how long it would be before the "hey, this is really complicated" line came out. Yes, we know it's complicated. We also know it's so damn complicated that the people who prefer to patronise non-financial mortals couldn't understand it either.

But the very fact of its complexity doesn't give people a pass here. Just because it's complex doesn't mean that a plan concocted by the very same fuds who got themselves covered in shit is the only way out. Just because it's complex doesn't mean that normal rules of financial gravity should be suspended. Just because it's complex doesn't mean that nobody anywhere should go to jail.

I'm not sure why the jail rhetoric frightens you so much. Is it just that they shouldn't go to jail for being greedy fools? Why, is that unfair?

I'm hoping they'll drive a hard bargain. We're certainly giving them all the tools necessary to straighten this mess out once and for all.

I too hope they'll drive a hard bargain while paying money in return for worthless things, yes. But we're certainly not giving ourselves any of the tools to ensure we can do anything more than hope that Paulson sees us right.
posted by bonaldi at 12:53 PM on September 21, 2008


I don't care if the executives go to jail, I just don't understand why they shouldn't be destitute. If their skills are really that valuable, it should only take them a year to amass another $100m.
posted by polyhedron at 12:54 PM on September 21, 2008 [1 favorite]


Then why is Obama supporting it?
Is he? I haven't seen any comments of support from him. Keep in mind there is a huge difference between "A Bailout" and "This Bailout" It's entirely possible to have a good bailout that punishes the stockholders in a company. Just look at the AIG bailout, I think that's a good model.

Let me say that again, there is an enormous difference between A BAILOUT and THIS BAILOUT. We can bailout these companies and keep the credit markets working without handing over a trillion dollars to wall street. One example would be for the government to provide loans paid with equity in the company. The shareholders would lose most of the value (as they should). Another example would be for the government to provide loans directly to consumers -- possibly taking over the actual work the lenders do (i.e. the employees would switch from working for the institutions to working for the government). There are lots of options.
For fuck's sake! The banks didn't break any laws. The executives didn't break any laws. They took risks and didn't look ahead. It's the regulators job to see this, and enact regulation to prevent collapse. The SEC, Fed, and various other regulatory bodies were asleep at the switch. -- SeizeTheDay
I think there was a lot of fraud at the lower levels of the mortgage thing, just look at Casey Serin. "NINJA" loans, etc.
posted by delmoi at 12:56 PM on September 21, 2008


Krugman: Thinking the bailout through
posted by homunculus at 12:58 PM on September 21, 2008


If your company is too big to fail, it's too big to exist.
posted by PenDevil at 1:00 PM on September 21, 2008 [12 favorites]


Over the past two weeks, I have become more and more frustrated with professional media coverage of these events. Most media resources seem to be doing an alright job in simply telling us what has happened, so the facts are being captured in a timely fashion, generally. However, analysis and explanation has been thin and seemingly ignorant, heavy on the summary "I don't know."

Usually I look to MeFi threads for links to a multiplicity of the overlooked thoughtful commentary and analysis piece. For some reason the to-me more combative tone of the financial crisis threads has made them a less effective source of links than I have seen recenty in other current-events threads in the Blue. I'm not sure that this thread has been as thumb-in-the-eye as recent predecessors; can we keep it that way?

And may I respectfully request a financial-thread die-hard to be so kind as to assemble a pseudo-definitive reading list on these events, preferably including a wide range of ideological perspectives?
posted by mwhybark at 1:04 PM on September 21, 2008


Just thinking about the bailout being open to foreign firms... Who wants to bet that foreign banks are furiously slicing up crappy mortgages in their home countries to "sell" to their American operations?
posted by PenDevil at 1:05 PM on September 21, 2008


Matt Yglesias has been covering this pretty well also.
What’s more, though I suppose it’s indelicate to raise this point, Paulson’s going to be out of a job in a few months and presumably looking for employment in the very same financial industry he’s now in charge of bailing out. The potential conflict of interest is mind-boggling.
posted by delmoi at 1:06 PM on September 21, 2008 [1 favorite]


The investment banks fed like parasites for years on the real economy, created huge tax havens for themselves, cooked their books with Enron-like abandon, invented ever more complex, arcane and risky ways to generate money out of thin air, encouraged predatory lending schemes, paid their CEOs obscene sums of money, and now that the whole thing has come crashing down, they want us to bail them out--b/c the consequence, they breathlessly tell us, will be our jobs, our credit, our savings, our entire economic future. Paulson is selling us a lemon and telling us to make lemonade, but where is the consequence for the actions of those who caused all this?
posted by ornate insect at 1:06 PM on September 21, 2008 [1 favorite]


Er, if it were sustainable would we be having this discussion?

I don't think the housing bubble really represented economic growth to begin with.

I personally think the goal is the exact opposite -- the assets are illiquid because the holders won't accept their value not due to a lack of buyers.

This is simplistic. I think they're actually quite difficult to value (particularly since the old valuation models have been shown to be incorrect), and since there's no longer a functioning market in them and everyone is generally spooked, buyers are grossly low-balling.

If the wider economy needs these institutions to be bailed out, why not do in in the usual way? Nationalize them, take them over, make sure they can't keep doing risky business, then sell off the assets later.

Not sure. The U.S. financial services industry does a great deal of foreign business, though, and in nationalized form, it might be perceived even more strongly as a tool of American foreign policy--and thereby lose a lot of value due to nationalization. There's a similar concern (going the other way) with sovereign wealth funds investing in the U.S.
posted by Mr. President Dr. Steve Elvis America at 1:10 PM on September 21, 2008




My plea: don't lurk IRL. How old are most MeFites, do you reckon? Yes, we'll be dealing with the fallout for years to come, but the people who have every right to be totally pissed are the Boomers with eviscerated 401(k)s. Social Security, Medicare were already major spending issues pending for the Boomers before all this hit. AARP is going to be a heavy lobbying voice because Boomers vote. Every pissed off person should call / email Congress to express your views as forcefully as possible. Now. If you have enough time to be reading this, you can send an email to your Senators and House Representative. It's an important election year. Do more than just vote.
posted by woodway at 1:14 PM on September 21, 2008 [1 favorite]


Oh, and one other thing: pretty much ALL the online commentary I have seen about THIS weekend's bailout has focused on the no-review and rotating credit-limit stuff.

First, are there any countervailing interpretations?

Second, if this is fast-tracked, and the apparent crystal-clear inadvisability of the current bill is accurate, how can we stop it?
posted by mwhybark at 1:17 PM on September 21, 2008


Mr. President Dr. Steve Elvis America: Not sure. The U.S. financial services industry does a great deal of foreign business, though, and in nationalized form, it might be perceived even more strongly as a tool of American foreign policy--and thereby lose a lot of value due to nationalization.

But who cares if they lose value? The US taxpayer has acquired these companies at fire-sale prices anyhow. The reason for the bailout was supposed to be, in your words:

...the ordinary guy

...an unknown number of non-financial businesses will have failed due to an inability to raise operating capital. A lot of people will have lost their jobs and homes and gone bankrupt.


Is the point of the bailout to help the ordinary guy, or to prop up the value of failed private companies?
posted by TheophileEscargot at 1:19 PM on September 21, 2008


My plea: don't lurk IRL. How old are most MeFites, do you reckon? Yes, we'll be dealing with the fallout for years to come, but the people who have every right to be totally pissed are the Boomers with eviscerated 401(k)s

Except, a total bailout would boost the value of their 401(k)s quite a bit, and as they retire they'll no longer be paying income tax. For them, a total scott-free bailout works out. At least for the rich ones. Meanwhile the next generations are hobbled with massive, massive government debt.
posted by delmoi at 1:20 PM on September 21, 2008 [1 favorite]


Of course, I can't vouch for the authenticity of this, but yes, there are deeply angry democratic members of Congress.
posted by manguero at 1:22 PM on September 21, 2008


Is the point of the bailout to help the ordinary guy, or to prop up the value of failed private companies?

I think there’s going to be a strong interest to deal with the Main Street aspects of this. BOEHNER: But we’ve already dealt with that, when we passed the housing bill last summer.

Not for main street but wall street.
posted by rough ashlar at 1:23 PM on September 21, 2008


But who cares if they lose value?

Policy makers, hopefully. There's not much sense in structuring a bailout in a way that destroys value if there's a way to do it without destroying value.
posted by Mr. President Dr. Steve Elvis America at 1:30 PM on September 21, 2008



Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.



This bill raises the statutory debt limit to $11,315,000,000,000 - 11.315 QUADRILLION dollars! This is a figure that is several orders of magnitude larger than any debt figure mentioned in the public media. Is this an accurate number, a cyberpub exaggeration, or an accurate representation of the amount of “money” in circulation?
posted by rough ashlar at 1:36 PM on September 21, 2008


That's trillion, dingbat.
posted by SeizeTheDay at 1:40 PM on September 21, 2008 [7 favorites]




For them, a total scott-free bailout works out. At least for the rich ones.

Amazingly enough AARP doesn't just represent just the rich ones, and Congress is supposed to represent us all. If you live in a battleground state, or somewhere that's in serious play for a House or Senate race, all the more reason to weigh in.
posted by woodway at 1:42 PM on September 21, 2008


This bill is a complete sham. To reiterate what someone posted before: I have put up with a lot of shit these past years, but this just takes the cake:

1. No oversight
2. Blank check (REVOLVING credit line)
3. Paying above market rates for these CDOs/Assets/Liabilities
4. Foreign institutions get to play and we pay
5. No investigations, punitive actions or other remedies against the assclowns who created this mess
6. No regulatory reform

That just about sums it up. This is also why I've been on the phone and emailing every representative on the Senate banking committee and from my great state of Ohio begging them to shoot this puppy down as fast as can be.

Folks - the takeaway is that in America, we don't deal with our problems any longer, we find someone else to deal with out problems. In this case, by transferring a massive amount of financial losses from the private sector onto the public sector.

And as someone else pointed out earlier, what is completely and utterly shocking to me is how the media is glossing over this bill. Example - NPR this morning who interviewed some hack from Brookings Institute. In sentence one he states that the final bill to taxpayers will be significantly less than $700 billion, then in sentence two states that "we don't know the value of the potential assets to be purchased."

Huh? The interviewer didn't even skip a beat to ask the obvious follow-up question: "how the hell can you even venture a guess as to how much this is going to cost if we don't know the value of what we're buying?"

What will happen is this: Paulson will buy up tranches of debt at above market rates because the mark-to-market (ie: REAL value) price will come in at somewhere between 30 and 60 cents on the dollar. He will then turn around, mark those assets down a bit more, say an additional 10 cents on the dollar, and re-sell them back to the very same firms who offloaded them to begin with. Those firms will then be able to turn around and sell them, at a marginal profit while the Treasury takes the haircut.

Mark my words - this is the only way that they will accomplish the two goals of this bill: offloading toxic waste and recapitalizing the financial system. It's a gigantic money laundering scheme where you and I pay the bill for their recklessness.

No mas.
posted by tgrundke at 1:45 PM on September 21, 2008 [4 favorites]


This bill raises the statutory debt limit to $11,315,000,000,000 - 11.315 QUADRILLION dollars!

You should really learn to read.
posted by delmoi at 1:46 PM on September 21, 2008


This is simplistic. I think they're actually quite difficult to value (particularly since the old valuation models have been shown to be incorrect), and since there's no longer a functioning market in them and everyone is generally spooked, buyers are grossly low-balling.

Au contraire, you're being obtuse. The value is what the market will bear -- the buyers aren't lowballing, the sellers got greedy and leveraged themselves against a value artifically inflated by an out of control mortgage market.

I don't think the housing bubble really represented economic growth to begin with.

What in the world does that mean? Of course the housing bubble represented economic growth -- what it didn't represent was any REAL growth.
posted by polyhedron at 1:52 PM on September 21, 2008


Back in 2001 or 2002 I was talking with a friend of mine and he seemed of the opinion that the plan for the Bush administration was to spend such astronomical sums of money that the country would be basically bankrupt and rife to be bought piece by piece for pennies on the dollar. The idea seemed absurd to me at the time...
posted by clevershark at 2:02 PM on September 21, 2008 [1 favorite]


But get them when they're on their knees, when they need liquidity, Paulson can call the shots. He can demand pretty much any terms he'd like, and since there is a dearth of buyers for banks and banking assets these days, he'll get it.

Mutant, what incentive does Paulson have to implement any tough terms on the banks? He's the former CEO of Goldman and our government is basically a revolving door for big business. What possible reason would he have to "stick it" to the banks?
posted by ryoshu at 2:02 PM on September 21, 2008


Au contraire, you're being obtuse. The value is what the market will bear

You're being obtuse. There's not a functioning market. That's the whole problem.

What in the world does that mean? Of course the housing bubble represented economic growth -- what it didn't represent was any REAL growth.

Now you're being beyond obtuse. You honestly think that when I said "really represents economic growth", I meant "economic growth" to include fake economic growth, particularly since I had already referred to the "real economy"?

I think I'm done talking to you. You're just playing that stupid game where you pretend to be illiterate.
posted by Mr. President Dr. Steve Elvis America at 2:04 PM on September 21, 2008


Sec. 10. Increase in Statutory Limit on the Public Debt.

Why bother having a debt limit at all if it keeps being raised whenever the debt gets to the theoretical limit?..
posted by clevershark at 2:05 PM on September 21, 2008 [1 favorite]


Can we start a single issue voters group that will cast a ballot in November against anyone who votes in favor of this plan?
The role of Congress is to do things slowly, to put the brakes on these knee-jerk stupid ass solutions - the Patriot Act was bait and switched at the last moment. These are bad solutions. The markets are going to have accept the fact that a reasoned approach to these problems takes months.
posted by dances_with_sneetches at 2:05 PM on September 21, 2008 [2 favorites]


MPDSEA, I really lost interest in talking to you when you displayed a lack of economic sophistication.

What you said MADE NO SENSE, and to tell me I'm obtuse for pointing out that "I don't think the housing bubble really represented economic growth to begin with" is a ridiculous statement doesn't change the fact that you're wrong.

The lack of a market for housing is not due to a lack of buyers, it's due to the owners of the mortgages not accepting their value. They CAN'T accept their value because they are highly leveraged against them. Which was what I said, and you refuse to acknowledge.
posted by polyhedron at 2:08 PM on September 21, 2008


There's not a functioning market. That's the whole problem.

There is a functioning market. The problem is that the functioning market has finally woken up and realized that the crap CDOs they've been buying aren't worth the paper they're written on.

Example - Lehman Brothers. When they went belly up there were plenty of interested buyers and plenty of dances going on. Sadly for Lehman, each potential buyer backed out once it saw how bad the books were and Lehman wouldn't agree to take the required haircut to get sold.

So, there are plenty of buyers, but they don't want to catch the falling knife, especially if the value of these assets may still be in decline. This is what makes the Paulson plan all the more insidious: it de facto makes the Treasury the price maker for these assets. It is, at its core, an attempt to backstop the deflationary spiral we're headed into, unless of course Hank thinks he can prop up the overbuilt housing market, reduce lending standards back to the boom years and also fix the insolvency problem of millions of Americans.

In the end, the value of the dollar will be trashed, long term rates will go through the roof, dogs and cats, living together...mass hysteria.

The law of unintended consequences is going to be a real bitch this time around.
posted by tgrundke at 2:14 PM on September 21, 2008


we don't need to rush through any new legislation, just undo every law Phil Gramm sponsored/was responsible for.
posted by Challahtronix at 2:16 PM on September 21, 2008


Does the $700 billion take into account the Alt-A mortgages that are about to start defaulting?
posted by PenDevil at 2:21 PM on September 21, 2008


That seems a lot riskier. If you allow non-financial companies to start failing, unemployment will go way up and the pain will really start for the ordinary guy.

What in the fucking Sam Hill do you think unemployment has been doing? Here in Illinois it's at 7.3%.

The value is what the market will bear -- the buyers aren't lowballing

I don't think you understand how this works. When the market has crashed and burned, prices are lower than would be indicated by balance sheets, and everybody is scared shitless, those low prices aren't because the market is acting to efficiently allocate capital in a situation where balance sheets have repeatedly proved as reliable as the Weekly World News's hard-hitting batboy coverage — it's those darned Debbie Downers in the media! Also evil, cackling short sellers following up their customary repast of babies and puppy dogs with a rousing bout of postprandial market destruction.

When the market is soaring, prices are at insane multiples of what would be indicated by the balance sheets, tarpaper shacks are selling in the low seven figures, and the NAR is singing us all to sleep each night with happily-ever-after lullabies where real estate never goes down and ARMs never reset and the bulldogs all have rubber teeth and the hens lay soft-boiled eggs, that's when the market is acting to efficiently allocate capital.
posted by enn at 2:22 PM on September 21, 2008 [2 favorites]


Mr. President Dr. Steve Elvis America:But who cares if they lose value?

Policy makers, hopefully. There's not much sense in structuring a bailout in a way that destroys value if there's a way to do it without destroying value.


Interesting. So you're saying that it's not just about the "ordinary guy", but should also be about propping up the share value of failed companies.

Well, it's a point of view.
posted by TheophileEscargot at 2:24 PM on September 21, 2008


Ignore the fact that the motherfuckers who screwed this up get their bonuses and paulson has threatened to block anything that cuts their golden parachutes.

Ignore the fact that Lehman is paying out 2.5 billion dollars in bonuses to the people who broke things and these bonuses are firewalled in the Barclay's buyouts.


Hush money.

Recipients will have to sign non-disclosure agreements which will serve to obscure for a while the worthlessness of the assets we're paying good money for, and to hide the active complicity of regulators in the flagrant and egregious criminal conduct by these corporations which has led us to this pass.
posted by jamjam at 2:29 PM on September 21, 2008


I've got to think about this some more, but I still believe we're not seeing much detail about how Paulson and his team will go about doing deals. I'm hoping they'll drive a hard bargain. We're certainly giving them all the tools necessary to straighten this mess out once and for all.

This is way, way too big to entrust to mere hope that Paulson will look out for taxpayers.

First, there's the conflicts of interests. One, Paulson is former CEO of Goldman Sachs (and thus may have been directly responsible for a measurable fraction of the investment banking sector's current problems), and, one assumes, has a lot of his own personal wealth tied up in that company. Two, he's going to be looking for work in a couple months, in the financial sector, one assumes. Three, the outside managers and outside companies that can be designated financial agents of the government that the draft legislation describes are going to have their own conflicts of interests, and will be operating much farther below the media's radar. More generally, Paulson has spent his career in investment banking, and it's probably inevitable that someone like that has a pretty positive view of how the success of the investment banking industry contributes to the success of America.

You could also try to guess how hard of a bargain Paulson will try to drive based on his actions so far, but it seems to me that most of the big interventions so far have been mainly overseen by Bernake, with the Treasury playing an assisting role, while this proposal would be the reverse. Still, it was a good sign that they forced JPMorgan to eat the first $1 billion in losses from the Bear Stearns deal, and while I haven't read the details, I've read commentary suggesting that the AIG loan actually came with reasonably strict conditions that gave AIG strong incentives to seek private funding first, not to mention the 79.9% equity stake. Letting Lehman fail was also a good sign, of course.

I'm most worried by this anonymous description of the conference call Paulson held with Congressmen yesterday. I'm trying to not read too much into it, because it's just an anonymous email on a blog, but it sounds believable. My biggest concern is just that there were lots of ways to structure this so that taxpayers get to share in any profits that this deal creates, an obvious concern, but the Treasury is pointedly avoiding committing itself to that. I also wonder if that's the point of the weird exemption from judicial review; if the Treasury bought a bunch of junk assets from the financial industry at, say, 60 cents on the dollar, and then six months later sold them back to the financial industry at 50 cents on the dollar (and maybe even repeated this a few times, since there's no cap on the total amount of assets they can purchase, just on the total amount outstanding at one time), could they or, more likely, the companies chosen to be "designated agents" open themselves up to some kind of financial mismanagement lawsuits?
posted by gsteff at 2:33 PM on September 21, 2008 [2 favorites]


MPDSEA, I really lost interest in talking to you when you displayed a lack of economic sophistication.

This approach may be necessary.
posted by Blazecock Pileon at 2:40 PM on September 21, 2008


gsteff: if you think it gives that Naked Capitalism link more credibility, it was linked from Greg Mankiw's blog as "well worth reading". That's the Greg Mankiw who was former chairman of President Bush's Council of Economic Advisors.
posted by TheophileEscargot at 2:42 PM on September 21, 2008


I read that anonymous blog posting on Naked Capitalism earlier today and it made my heart sink a bit. Not that I wasn't expecting this to be the case, no, I fully did, but that last bastion of hope in me was wishing that the Feds would take the high road and, you know, be somewhat honest as people tend to do when they're standing at the precipice.
posted by tgrundke at 2:55 PM on September 21, 2008


This approach may be necessary.

Holy crap. I read the rest of that thread and found it as fascinating as taking a stroll down a city street, only to find yourself walking past a bar with a full-blown fist fight already in progress. I need to lurk at MetaTalk more often.
posted by Marisa Stole the Precious Thing at 2:57 PM on September 21, 2008


It's all or nothing. What will you do?

I hear the season premier of Heroes is on tomorrow night!
posted by Nelson at 3:21 PM on September 21, 2008






Obama Draws A Line In the Sand: No Paulson Deal

Holy fuck. I'm actually surprised. I thought he would go along with this like FISA, frankly. Although now I'm more nervous then relived.
posted by delmoi at 3:50 PM on September 21, 2008 [1 favorite]


SeizeTheDay wrote: Democrats like Barney Frank who back in 2003-2004 thought that Fannie and Freddie should get bigger.

The problem is/was not their size, but their malfeasance. But nuance like that escapes the bailout cheerleaders, who seem to be, given their rah-rah attitude, part and parcel of the pump and dump scheme that got us here in the first place.
posted by wierdo at 3:56 PM on September 21, 2008


I'm hoping they'll drive a hard bargain.

Yeah, and I'm hoping for world peace and a solid gold rocket car.

Obama Draws A Line In the Sand: No Paulson Deal

He said that about FISA, too.
posted by dirigibleman at 3:56 PM on September 21, 2008 [1 favorite]


Well, he's saying no to the current deal. Here is what he actually had to say
As of now, the Bush Administration has only offered a concept with a staggering price tag, not a plan. Even if the U.S. Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering. And in return for their support, the American people must be assured that the deal reflects the basic principles of transparency, fairness, and reform.

First, there must be no blank check when American taxpayers are on the hook for this much money.

Second, taxpayers shouldn’t be spending a dime to reward CEOs on Wall Street.

Third, taxpayers should be protected and should be able to recoup this investment.

Fourth, this plan has to help homeowners stay in their homes.

Fifth, this is a global crisis, and the United States must insist that other nations join us in helping secure the financial markets.

Sixth, we need to start putting in place the rules of the road I’ve been calling for for years to prevent this from ever happening again.

And finally, this plan can’t just be a plan for Wall Street, it has to be a plan for Main Street. We have to come together, as Democrats and Republicans, to pass a stimulus plan that will put money in the pockets of working families, save jobs, and prevent painful budget cuts and tax hikes in our states.
The part about recouping the investment is important. Hopefully that means equity in the corporations (which is no guarantee of recuperation, but it gives us a better chance then just taking on the garbage assets, I think).
posted by delmoi at 3:57 PM on September 21, 2008 [2 favorites]


I have a bad feeling that all of this started when Bush answered an email about large sums of money needing to be transferred by someone at the Nigerian Central Bank.
posted by dances_with_sneetches at 4:06 PM on September 21, 2008 [11 favorites]


I have panic fatigue.
posted by spiderwire at 4:07 PM on September 21, 2008 [2 favorites]


I have a bad feeling that all of this started when Bush answered an email about large sums of money needing to be transferred by someone at the Nigerian Central Bank.

HELLO GOOD SIR,

I WRITE YOU TO OFFER AN EXCITING OPPORTUNITY TO PURCHASE SIXTEEN (16) POUNDS OF YELLOW CAKE URANIUM FROM CERTAIN INDIVIDUALS IN REPUBLIC OF NIGERIA. WE HAVE MANY SATISFIED CLIENTS SUCH AS THE IRAQI GOVERNMENT OF SADDAM HUSSEIN.

HOWEVER SUPPLIES ARE LIMITED. IF YOU ARE INTERESTED PLEASE REMIT 700 BILLION U.S. DOLLARS ($700B) TO THE ENCLOSED ADDRESS AS A SECURITY FOR YOUR URANIUM. WE LOOK FORWARD TO A LONG AND FRUITFUL BUSINESS RELATIONSHIP WITH YOU
posted by spiderwire at 4:15 PM on September 21, 2008 [3 favorites]


The problem is/was not their size, but their malfeasance. But nuance like that escapes the bailout cheerleaders, who seem to be, given their rah-rah attitude, part and parcel of the pump and dump scheme that got us here in the first place.

No, the problem is a bunch of partisan hacks who think they understand finance are rearing their heads in a place they don't belong, if only to inject their idiotic dogma in an election year. I've said this before and I'll say it again. The current crop of candidates have no solution, nor does Democrat Senate Majority Leader Harry Reid, who said in his sheer brilliance, "No one knows what to do." Imagine that: a United State Senate MAJORITY LEADER who announces to the public: "Hey, I'm a fucking moron who never paid attention to this; please Treasury Secretary Paulson, former CEO of Goldman Sachs, tell me what to do."

Here is what I think of the bailout. As it stands, in the terms that the Treasury has laid out, I am opposed. But don't let that silly fact stop you from painting me with the same polarizing brush you use to spark the dogmatic base you support.
posted by SeizeTheDay at 4:26 PM on September 21, 2008


Nigeria and Niger are different countries. Yellowcake comes from Niger, and the emails (stereotypically) come from Nigeria.
posted by delmoi at 4:26 PM on September 21, 2008


I am trying to make sense of all this at a layman/precalculus level, so please correct me if I am wrong by point out why.

Joe wants to buy an house, he goes to the bank. The Bank agrees to issue him a mortgage at a certain annual interest rate (say 3%). The Bank profits on the interest, of course, but the bank takes "ownership" of the house in order to play safe : if Joe doesn't pay , they get the house back.

Yet, the fact is the majority of Joes can ill afford buying a new house, because of their unstable incomes. That's bad for banks, as it means they can't issue as many mortgages as they would like or "need to" to make enough profits ; their bad performance hurts their stock value, which means no or little bonues for Big Management.

Yet what if they could issue many, many mortgages at low interests rates? Many Joes would agree to low interest rates over a long period, and the bank would be able to collect millions of little interest of millions of Joes, which sums up to huge amount of money. Also, the bank thinks, while some mortgage can fail they will not all fall, and all at the same time. Additionally, they hold the houses which are valuable.
So they issue a big number of mortgages to many people, including the Joes that don't offer many guarantees. As the Bank is no fool, they also think they could insure themselves against the risk, so they go to an Insurance Company of some kind. They agre on the following : the bank will pay the Insurer 1/3 of what he gains from Joes, in exchange of a "insurance policy" , that the Insurer will pay all the interest that Joe owns to the bank. They call it a swap, which is a basically a bet : the Insurer thinks Joes will be able to pay and is ready to get a shitload of money (1/3 of all of the Joes interests) without actually paying a dime! That's some bet! But if Joe fails, the Insurer will pay the bank what was owed by Joe.

In the Bank accounting books, we read thay they have a 2 credits : one toward Joes, one toward the Insurance company and, on top of this, they have control of the houses. Looks like failsafe! Everybody at Bank is happy.


Yet Insurance Company is not fool, either. What if Joe actually doesn't pay? They need to get rid of this huge risk, so they too try to swap their risks by selling CDOs, which is a fancy name for an obligation that is backed by a mortgage, which looks pretty much safe. Yet there is no market for these CDOs, as nobody can really figure out how much they are worth. In order to make them "nicer" they take a portion of the mortgages that look "good" and have them rated by rating agency as "AAA" , which in financial lingo is "damn hell sure it will pay!" ..others are rated as BB , some are not even rated as they look very bad : in order to make them look better, an higher interest rate is offered to any buyer, which is a nice lure.

There is no official market for CDOs, so they are sold to other Companies (so called over-the-counter). As they look "solid" and, maybe, by some lax accounting could be shown as "immediate profit" , they are bought and sold all over the place to make the accounting look good and profiteable, which is what you need to have if you want a bonus at the end of the year.

But, the shit hits the fan. Many Joes aren't paying, many at the same time! The banks could sell the houses to raise the cash they need to owe, but alas the market price of houses is down as many are trying to sell at the same time, generating an excess offer of houses. So they turn to the Insurance Companies, but ....they don't have the money! They also took a bet without having enough cash. The Insurance company now chase the owner of the CDOs they sold...but they were sold again and again and again in an unregulated market..who owes them money ? An enormous litigation is likely to ensue, but they need money right now!

The Banks could borrow some money from the Central Banks (Fed) , but there are limits to what they can borrow and they don't want to be forever indebted with the C.B. either. Ordinarily, the Bank should become bankrupt indeed.

Yet, what if the Government buys the Insurance Company? This way, the Bank's creditors will be reassured that they will be paid! The alternative, the Bank would say, is that we go bankrupt and bring all the credit system to a standstill. All at the same time. Do you take the poison pill or the poison pill?
posted by elpapacito at 4:41 PM on September 21, 2008 [4 favorites]


In Edward Bellamy's 1888 uptopian novel "Looking Backward: 2000-1887", corporations become so large they are indistinguishable from the government. He was off by only eight years. Seriously, as long as things have gone this far, why not go all the way?


And will all of this emergency action bring house prices back to Earth?
posted by AppleSeed at 4:52 PM on September 21, 2008


And will all of this emergency action bring house prices back to Earth?
That suggests they're in some way out of whack. They're not. They just aren't achieving their "fair market price" because of "difficult conditions".
posted by bonaldi at 4:53 PM on September 21, 2008


And will all of this emergency action bring house prices back to Earth?

Well, as I understand it, although in many regional markets real estate gains in recent years far outstripped basic measures of affordability, and despite the fact that anywhere from a few percent up to 30% or so (in Southern California) has been clawed back since 2006, the net effect (in this small particular) of the new Bailoutonomics regime is that credit is meant to once again be easier for Joe Borrower to get, supporting house prices, and papering over some of the on-the-street problems that got America to where it is now. As if winding the clock back to 2005 for ordinary folks who don't know and don't want to know about the Great Unwinding will somehow make things better. Affordability in many (most?) markets will not be achieved, huge mortgages will still be the order of the day for most, round and round we go.
posted by stavrosthewonderchicken at 5:05 PM on September 21, 2008


Those who know more or better, please correct me if I'm wrong.
posted by stavrosthewonderchicken at 5:06 PM on September 21, 2008


While you are writing to your representatives, please cut and paste the following list of emergency demands from We The People:

1. Universal health care
2. Schools in all fifty states of equal high quality
3. Voting system that is reliable, open source, and verifiable
4. Clean environment and massive program to halt global warming including:
5. Research on (and deployment of existing) alternative energy
6. Refurbishment of infrastructure
7. Improved public transport and new high-speed passenger rail system
8. Affordable housing - this now means for the middle class as well as the working poor
9. Anything else you want: obviously we *can* afford it, even though the GDP is only about $14B and the national debt is running around $9T.
posted by AppleSeed at 5:08 PM on September 21, 2008 [1 favorite]


People, please. Everyone just calm down, OK? Our economy will get right back on track once we return to a wampum-based market. No more imaginary money gaining interest on imaginary money. No more astronomical sums rippling through global economies. Just good ol' shells, bones, and maybe some pieces of mirror. Income you can see and feel. Millionaires forced to carry giant burlap sacks of beads if they want to do some heavy trading. I've already gotten a head start, personally - I'm up to 50 oyster shells and have broken every mirror in my house. Better get in on the ground floor before it devalues!
posted by Marisa Stole the Precious Thing at 5:15 PM on September 21, 2008


Load up your guns, call your friends.
posted by Max Power at 5:22 PM on September 21, 2008


SiezeTheDay wrote: Here is what I think of the bailout. As it stands, in the terms that the Treasury has laid out, I am opposed. But don't let that silly fact stop you from painting me with the same polarizing brush you use to spark the dogmatic base you support.

I presumed you would be smart enough to realize that I was referring to bailout cheerleaders, since it was, you know, right there in the text. If you aren't a cheerleader, most of what I wrote doesn't apply to you.

Only the part that was in disagreement with what you wrote applies. That is, the part about the problem being malfeasance, not size.

Now that we are where we are? The bailout is beyond useless for any purpose except draining the treasury, which is exactly what I'd expect from the Bush administration. (but not all Republicans..I'm not that dogmatic..I'm usually the one defending the old guard Republicans amongst my friends)

One of the things that needs to happen to ease the suffering is force the lenders to relax payment terms to something affordable. Then the mortgage backed securities will be worth more (but still less than they were, obviously), since there will be a good chance of a continuing stream of income, rather than default after default.

Yes, there are other issues, but at least with that happening, the toxic waste wouldn't be so toxic. It would have value, even if it's not as much as we'd like. Certainly more than the vultures would like to give.
posted by wierdo at 5:26 PM on September 21, 2008


W00t. Nancy Pelosi wants major modifications, largely inline with the principles Obama suggested. For once, the Senate Republicans are at a disadvantage, tactically; Pelosi can pass whatever she wants, and if they fillibuster it, they'll be blamed.
posted by gsteff at 5:26 PM on September 21, 2008


What's up next? Claims that the US Economy needs to keep going otherwise Osama wins
posted by rough ashlar at 5:35 PM on September 21, 2008


One of the things that needs to happen to ease the suffering is force the lenders to relax payment terms to something affordable.

You cannot negotiate that which you do not own. That's the difference between a mortgage and a MBS. The most toxic of securities lie in the hands of hedge funds, and other investors. The only securities you could theoretically negotiate are the ones that lie on the banks' books, but those are a mere fraction of those outstanding.

You can't save homeowners from 20-40% housing price drops. And even if you could renegotiate interest rates and payments, a great many people are simply in houses they can't afford, and who have no equity in their homes, so they have no reason to stick around. They walk, foreclosure occurs, urban blight continues.

You want to save the banks, because THEY are the key to relaxing lending standards and getting people into mortgages again (albeit far more traditional ones). But then that comes back to HOW you save the banks.
posted by SeizeTheDay at 5:38 PM on September 21, 2008


SteveInMaine - it must have been Thomas Frank as that is part of the underlying thesis of his new book.
posted by 8 Bit at 5:47 PM on September 21, 2008


elpapacito -- "I am trying to make sense of all this at a layman/precalculus level, so please correct me if I am wrong by point out why."

Hey neat, I always like to help folks understand these things, so let me add / refine a few points and see where you end up ...

"Joe wants to buy an house, he goes to the bank. The Bank agrees to issue him a mortgage at a certain annual interest rate (say 3%). The Bank profits on the interest, of course, but the bank takes "ownership" of the house in order to play safe : if Joe doesn't pay , they get the house back."

Yeh, in reality there would be many different agents on the demand side. Joe, Jane, Dick, Harry, each with their own credit ratings and associated probability of default (PD). Actually, its probably best to consider Joe / Jane / Harry / Dick as representative of a specific PD, within, of course, boundaries; i.e., PD between 0.1% and 1% for Joe, PD between 1% and 2% for Jane, etc. All the way out to Dirty Dick (no offense to any Richards reading this) who has a PD of (just tossing numbers out here) between 10% and 30%.

As PDs increase so do yields payable; necessary to entice purchasers to hold the products we're gonna structure with these mortgages.

Not that this doesn't indict a specific Joe / Jane / Harry / Dick; rather these PDs are assigned to a heterogenous class of obligors or loan holders.


"Yet, the fact is the majority of Joes can ill afford buying a new house, because of their unstable incomes. That's bad for banks, as it means they can't issue as many mortgages as they would like or "need to" to make enough profits ; their bad performance hurts their stock value, which means no or little bonues for Big Management."

Well, the Investment Banks typically didn't see incomes, etc. This task was handled by the mortgage brokers and other folks that actually offered the financing to the "man in the street". Sidenote: in the late 90's when I worked on an Mortgage Backed Securities Desk, this wasn't the case; we provided full services, from property / obligor evaluation to structuring the products to sale of the MBS (CDO equivalent), but the scale of business was much, much smaller.


"Yet what if they could issue many, many mortgages at low interests rates? Many Joes would agree to low interest rates over a long period, and the bank would be able to collect millions of little interest of millions of Joes, which sums up to huge amount of money. Also, the bank thinks, while some mortgage can fail they will not all fall, and all at the same time. Additionally, they hold the houses which are valuable."

Yeh, you've got to tighten this up to reflect different default / risk rates. And the statement about "Additionally, they hold the houses which are valuable." really should reference recovery rate, or the value of the property that the bank might be able to recover should the obligor default on his / her mortgage.


"So they issue a big number of mortgages to many people, including the Joes that don't offer many guarantees. As the Bank is no fool, they also think they could insure themselves against the risk, so they go to an Insurance Company of some kind. They agre on the following : the bank will pay the Insurer 1/3 of what he gains from Joes, in exchange of a "insurance policy" , that the Insurer will pay all the interest that Joe owns to the bank. They call it a swap, which is a basically a bet : the Insurer thinks Joes will be able to pay and is ready to get a shitload of money (1/3 of all of the Joes interests) without actually paying a dime! That's some bet! But if Joe fails, the Insurer will pay the bank what was owed by Joe."

Ok, this is where you've gone totally wrong. The "insurance" you mention is called a Credit Default Swap, and its rarely purchased on a single mortgage.


"In the Bank accounting books, we read thay they have a 2 credits : one toward Joes, one toward the Insurance company and, on top of this, they have control of the houses. Looks like failsafe! Everybody at Bank is happy."

Although accounting standards kicked this entire mess off, I'd suggest dropping accounting from this (otherwise pretty neat) summary, as there is a hell of a lot more going on from the accounting perspective than included here.


"Yet Insurance Company is not fool, either. What if Joe actually doesn't pay? They need to get rid of this huge risk, so they too try to swap their risks by selling CDOs, which is a fancy name for an obligation that is backed by a mortgage, which looks pretty much safe. Yet there is no market for these CDOs, as nobody can really figure out how much they are worth. In order to make them "nicer" they take a portion of the mortgages that look "good" and have them rated by rating agency as "AAA" , which in financial lingo is "damn hell sure it will pay!" ..others are rated as BB , some are not even rated as they look very bad : in order to make them look better, an higher interest rate is offered to any buyer, which is a nice lure."

No, the issuing bank structures the CDO, not the insurance company (actually the firm that sold protection from default). And although institutional class investors had their own models and quants, and could back into the market value of the structured products (CDOs in this case), the ratings agencies provided the so-called objective party validation of the instruments value (I've previously commented on the problems the ratings agencies ran into, but having been employed by one I'm not going into further details).


"There is no official market for CDOs, so they are sold to other Companies (so called over-the-counter). As they look "solid" and, maybe, by some lax accounting could be shown as "immediate profit" , they are bought and sold all over the place to make the accounting look good and profiteable, which is what you need to have if you want a bonus at the end of the year."

I'm not totally sure about the "lax accounting" here. Bonuses are good though.


"But, the shit hits the fan. Many Joes aren't paying, many at the same time! The banks could sell the houses to raise the cash they need to owe, but alas the market price of houses is down as many are trying to sell at the same time, generating an excess offer of houses. So they turn to the Insurance Companies, but ....they don't have the money! They also took a bet without having enough cash. The Insurance company now chase the owner of the CDOs they sold...but they were sold again and again and again in an unregulated market..who owes them money ? An enormous litigation is likely to ensue, but they need money right now!"

Ok, this part isn't too solid as presented. The owner of the CDO is the firm that hold's it - did you mean "issuer"? (sorry, we've been out to a show, moshing about and I'm sleepy so not sure ...) .


"The Banks could borrow some money from the Central Banks (Fed) , but there are limits to what they can borrow and they don't want to be forever indebted with the C.B. either. Ordinarily, the Bank should become bankrupt indeed.

Yet, what if the Government buys the Insurance Company? This way, the Bank's creditors will be reassured that they will be paid! The alternative, the Bank would say, is that we go bankrupt and bring all the credit system to a standstill. All at the same time. Do you take the poison pill or the poison pill?"


Definitely should be limits.

Hope this helps!
posted by Mutant at 5:53 PM on September 21, 2008 [4 favorites]


Pelosi Statement on Legislation to Address Crisis in Financial Markets:
“We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome. Democrats will act responsibly to insulate Main Street from Wall Street."
posted by ornate insect at 5:56 PM on September 21, 2008 [2 favorites]




How about this?
If you come to the Fed's window to get your bad paper bought, you are automatically signed up for a 50% tax on any profits you or your subsidiaries make for, say, the next 25 years. This tax is transferable--meaning if the company is acquired by another, the obligation is also acquired. You are automatically agreeing to a bi-annual government audit to make sure you are accurately stating profits and losses and not playing any sort of shell-game to defraud the government. It strikes me as win-win. Those corporations being saved by this bailout will still have a profit motive, but the taxpayers will be getting extra back from them.
posted by Chrischris at 6:26 PM on September 21, 2008


of the new Bailoutonomics regime is that credit is meant to once again be easier for Joe Borrower to get, supporting house prices

Home prices are supportable by buyer purchasing power.

Purchasing power is driven by:

a) take-home income after higher-priority items: taxes, food costs, retirement savings, medical care costs, energy costs, education costs.

b) the cost of borrowing and repayment schedule. It would have been cheaper than $700B to institute 100 year 1% balloon mortgages perhaps, but with the current regime of 6% fully-amortizing rates prices will still adjust away (ie down) from the price levels seen with the 3-5% neg-am / teaser rates of 2004-2006.

c) supply/demand issues in the local market. The Great Jobs Rush of 1996-2000 here in the Bay Area resulted in low apartment vacancies, rising rents, and thus rising home valuations.

Krugman's "liquidity trap" thesis argues that just making credit "available" doesn't solve anything. Borrowers must be willing & able to borrow this money.
posted by troy at 6:36 PM on September 21, 2008


The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.
~ Federal Reserve, 9/21/2008

Morgan and Goldman really, really want to be independent...
posted by SeizeTheDay at 6:44 PM on September 21, 2008


Matt Yglesias:
Bush and Paulson say congress needs to rush and give them a blank check — no time to think about it, change anything, or scrutinize anything.

It seems strange to me that they didn’t bolster their rhetoric by providing congressional leaders with a list of all the times congress and the American people decided to swallow their skepticism and give the Bush administration the benefit of the doubt, and then everything worked out fine. It’s a really long list, so spelling it out in detail would surely convince a lot of people. Like remember when some folks said Bush’s math was wrong and his tax cuts would lead to large deficits? Idiots! Or those who warned that occupying Iraq might be kind of hard? Morons! If you can’t trust George W. Bush with an unlimited grant of authority then who can you trust?
posted by delmoi at 7:00 PM on September 21, 2008 [2 favorites]


In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer

So the US government (ergo taxpayers) will be bailing out crown companies?
posted by rough ashlar at 7:23 PM on September 21, 2008


As if winding the clock back to 2005 for ordinary folks who don't know and don't want to know about the Great Unwinding will somehow make things better.

Back to 2005? I don't think so. US household debt expanding at a rate of 9% of GDP per year is probably not going to happen again any time soon. At least, I hope not.

If they're going to save this banking system, get it back to its function of creating lots of new debt so we can pay off the old debt, I hope they start thinking about finding a way to put its astounding powers of credit creation to more productive uses.
posted by sfenders at 7:24 PM on September 21, 2008


So the US government (ergo taxpayers) will be bailing out crown companies?

Credit, not bailout, not handout, not food stamps, CREDIT, i.e. liquidity.
posted by SeizeTheDay at 7:32 PM on September 21, 2008 [1 favorite]


Shanhai stock exchange up 7% Monday morning (so far)

Should be an interesting day on wallstreet tomorrow.
posted by delmoi at 7:55 PM on September 21, 2008


How much of the ultra-wealthy's wealth can be brought to bear against the insane debt the USA now faces? Over the past twenty-ish years CEO pay has gone from being an order of magnitude difference to two orders of magnitude difference from the average employee wage.

IOW, CEOs used to be paid about 10x more than you. Now they are paid 400x more than you. You earn forty thousand dollars, they earn $16 000 000.

That is, to put it bluntly, fucking insane.

The resources of America are being pocketed as the wealth of a very select few. You are always in debt. They have paycheques in the tens of millions.

The top people at Lehman Brothers are being paid billions in bonuses to stay on while the purchase/rescue is put into play. Paid billions to be loaned billions to be given an opportunity to save themselves from the things they did. They fucked up, and you pay their bonus.

You watch: Dubai is the future. All these thieves are going to expatriate and live in the next-generation fantasy city of the ultra-wealthy. They'll be living in truly wonderous buildings a literal mile high, on man-made islands on equatorial waters, gambling in the most outlandish casinos, skiing inside the artificial mountain, racing boats on artificial lakes, basking in the glory of having looted America.
posted by five fresh fish at 8:04 PM on September 21, 2008 [3 favorites]


The market is betting on deflation, as I mention here (paradox of deleveraging and liquidity trap).
posted by SeizeTheDay at 8:06 PM on September 21, 2008


By the way, how do people check futures options over the weekend or at night? I've seen people posting about it on Google and I've been kind of curious.
posted by delmoi at 8:16 PM on September 21, 2008


Here are the overnite Futures.
posted by wallstreet1929 at 8:29 PM on September 21, 2008


Krugman's "liquidity trap" thesis argues that just making credit "available" doesn't solve anything. Borrowers must be willing & able to borrow this money.

Not really the issue. People don't "need" to buy homes. House prices *in and of themselves* are not the important thing. If all house sales stopped tomorrow, most everyone would still have a home. It's really not important that people be able to continually buy newer awesomer homes.

Consider this scenario:

1. House loans get overissued, so lots of people get houses they couldn't "afford" in the sense that they can't pay the mortgage.

2. The increased demand naturally inflates house prices. But now, in addition to a lot of people getting loans they can't pay, lots of other people get 2nd mortgages because there's so much money in it. That just pushes prices higher, etc.

3. Once everyone has houses (you can only move so often), demand recedes and house prices fall again, but the issuers are left holding the bag. Say someone wanted to buy a $200K house. The bank gave them a mortgage that plus interest will come to $250K. But the person defaults and the bank forecloses. But now prices have tanked and the house is only worth $150K -- so the bank is $50K in the hole.

(Note that the person in this example isn't one of the people in (1) who got a house "they couldn't afford" -- they were a regular home buyer who got a $250K mortgage at the market rate on a house that's only valued at $150K now. They're walking away because they can't afford the $100K loss any more than the bank. Note also that they *gave the house back* so it's not as if they gained much from this.)

(Note also that the bank that foreclosed isn't necessarily the one that made the "bad" loans, either -- let's go further and say that company was very-well-collateralized, so they actually just renegotiated their loans at lower rates and they're still getting paid off just fine.)

(In other words, the bank and homeowner in our example didn't do anything "wrong": in fact, they made a routine purchase in a rationally-priced market.)

4. Now, the "actual value" of the house *still might be $200K*, but since the bank can't sell it at that price, that's irrelevant. But say you packaged 5000 of those mortgages together, resold the default risk, and 100 of them defaulted even though there's no actual value loss: OK, now the bank is kind of off the hook, but now the big institutional lender that bought the default swap owes $5M, even though they probably thought they were making a safe investment in a historically-stable market. And they can't even resell the actual asset, because the bank owns that.

5. Now, if we could find someone to *hold* this asset, eventually prices would return to the right spot and there'd be no losses at all. But all the other institutional lenders are in the same situation, so no one can hold the asset. That's the liquidity crisis.

6. So now we have a person kicked out of their home, a messy foreclosure sale, a huge credit default, and since no one's occupying the house it's deteriorating and *actually losing value* more than it would if we'd just let the person stay there. Note that we would all have been better off here if we'd just never foreclosed in the first place. The rational thing to do would have been to let the homeowner extend the term of their mortgage and reduce their payments to a manageable level.

7. And now that no one can afford to issue new mortgages, demand in the housing market falls, so price falls further, leading to *more* foreclosures and *more* defaults and making the situation worse even though the underlying assets are the same.

I don't think there's anyone "at fault" in this scenario. That's not to say that there weren't people making or receiving bad loans -- the point is that even with an entire market of rational, responsible actors, you'd still be stuck in the liquidity trap. So the question is how we get out of it.
posted by spiderwire at 8:32 PM on September 21, 2008


clever comment recent activity
posted by salvia at 8:46 PM on September 21, 2008


Back to 2005? I don't think so. US household debt expanding at a rate of 9% of GDP per year is probably not going to happen again any time soon. At least, I hope not.

Well, we've all been hoping our hopes, haven't we? And look where that's gotten us.

My 'back to 2005' comment was intended to gesture at a situation where overvalued and rising real estate, near-zero personal savings, and shoddy mortgages pushed like vials from the local crack dealer conspire to convince the innumerate that All Is Well and that particleboard McMansion out in the 'burbs really is affordable -- just cut a few corners and what was that about adjustable rates again?

In other words, that if the intention is to go 'back to normal', it's a fairly important thing to decide what normal should actually be.
posted by stavrosthewonderchicken at 9:05 PM on September 21, 2008


Presumably Obama is going to win, and this is how they make sure all the money ends up in "safe hands".
posted by Artw at 9:19 PM on September 21, 2008


Here's the deal as I see it. The market is going to crash, the only thing left to see is if it happens fast or slow. Both sides of the aisle have a vested interest in making it happen slow. I think you will see it not crash, but violently whip-saw up and down, but still trend down. In addition, the dollar will suffer miserably and earnings will not return for years. The stock market is fueled by earnings and there are no earnings increases.

Stocks have been overpriced (high P/E ratios) since BEFORE the dot-com bust and have not returned to historic levels. The market will not be healthy again until P/E rations get real again.

These bail-outs keep the financial system from seizing up, but that's it. Think about it. We are using dollars or green paper to pay for bad loans or white paper. That does absolutely nothing positive for GDP, it just keeps the traders trading.
posted by Rafaelloello at 9:28 PM on September 21, 2008


troy writes "This is going to be bad, 10X worse that RTC, about as bad as Iraq.

"Think of this plan as 'The Surge' in monetary policy if it helps, for that's the basic crisis-management framework that was used to get us here."


And just like the Surge, the real point of this is to kick the can down road so that the problem becomes the next Administration. Bush will be back in Crawford, polishing yellow cake replicas in his Presidential Library, Hank Paulson will be back in a cushy Wall Street job or "consulting" for a lobbyist firm.

The Obama Administration will at best, on the unlikely chance this boondoggle "saves" anything, have to eliminate most of his legislative program (health care, etc.) to pay the debt for keeping bad Wall Street banks profitable.

More likely, this will only forestall a crash until 2009, so the Republicans can blame it on Obama and a Democratic Congress. Which is why we have the Iraq Surge too.

It's just kick the can and let the Democrats have to both do the cleaning up and take the blame for the mess. That, and be blamed for passing no real new legislation, because all the money to fund it will have been sucked away in bail outs and recession.

Pelosi and Reid need to push back hard, but if she does, it'll be a first for both of those pushovers.
posted by orthogonality at 9:37 PM on September 21, 2008 [1 favorite]


Credit, not bailout, not handout, not food stamps, CREDIT, i.e. liquidity.

If you think we will ever see any of this money again, you're very, very optimistic.
posted by Blazecock Pileon at 9:43 PM on September 21, 2008 [1 favorite]


Can someone explain what just happened to Goldman Sachs and Morgan Stanley?
posted by poxuppit at 9:44 PM on September 21, 2008


delmoi: "6This bailout plan is like a joke. The Bailouts should work like the AIG bailout. The government got most of the equity at a really good price, so if AIG becomes profitable again (and hopefully it will) the government will collect most of the upside.

On the other hand, with this Paulson will just buy up all the garbage debt at whatever price he thinks is necessary in order to keep the institutions from failing, and that probably means paying more then they're worth. After all, if they paid the true value, the institutions would end up bankrupt.

So Paulson will just buy up all the garbage, and the stockholders will go on their merry way, owning all the upside. That's total bullshit.

And we're talking about $700 billion potentially erased from the U.S. treasury, money that can't go for health care, for rebuilding infrastructure, education, or anything else. On top of the $1T or who knows how much lost in Iraq when all the bills come due.

What a joke.
"

You think it's only $700 billion, that's the real joke. There are currently $60 TRILLION outstanding credit default swaps and $700 TRILLION in credit derivatives.

The money supply of the world is shrinking every day. No one can afford this bailout. Also anybody worried about inflation can forget it. This will end up being DEFLATIONARY. The US can run their printing presses round the clock, but they're only creating paper to buy paper. Meanwhile, unemployment continues to rise, people continue to cut their spending, jobs are lost, prices go down, rinse, repeat.

Jobs are lost, prices go down, rinse, repeat.

Jobs are lost, prices go down, rinse, repeat.
posted by Rafaelloello at 9:47 PM on September 21, 2008


There are currently $60 TRILLION outstanding credit default swaps and $700 TRILLION in credit derivatives.

And every day around $5 TRILLION is traded on the forex markets.

The money supply of the world is shrinking every day

no it's not. Bad debtors are akin to bank robbers perhaps, but the money they took is still in the economy.
posted by troy at 9:59 PM on September 21, 2008


Can someone explain what just happened to Goldman Sachs and Morgan Stanley?

They were over-leveraged and due to fail in this hostile lending environment.

Switching to bank regs and having the Fed backstop their debt for a week or two gives them a new lease. Wamu and Wachovia might give them new depositor bases once they bounce off the TARP ("troubled asset relief program").

US household debt expanding at a rate of 9% of GDP per year is probably not going to happen again any time soon. At least, I hope not.

And to think each year's GDP was driven up by the previous year's consumer borrowing! Ponzi would be proud!
posted by troy at 10:09 PM on September 21, 2008


If you think we will ever see any of this money again, you're very, very optimistic.

So, anyhow, you;re basuically just borrowing this money from China, right?
posted by Artw at 10:43 PM on September 21, 2008


I want to put Mutant on my keychain so anytime I don't understand something about the economy, I can just tug on his leg, his head lights up like an LED, and he 'splains it to me.

(But seriously, thanks Mutant. Your explanations are almost always really enlightening.)
posted by illiad at 11:19 PM on September 21, 2008


I don't think the real economy ever grew at an unsustainable rate. This bubble obviously grew at an unsustainable rate, though.

aargh. The f'in bubble DROVE the real economy. There was a trillion dollars of NEW lending every year to consumers 2004-2006 (here's a chart I made). ON TOP OF the deficit spending going on. American households have DOUBLED their indebtedness since 2000, yet the median income sure hasn't doubled.

And the statistics are actually worse than this superficial analysis, since 5-10% of the country has done damn well this decade, leaving the increasing debt burdens on the lower quintiles.

If it weren't for the Fed pushing the monetary throttles to the firewall 2002-2004, we'd STILL be in the 2001 recession, only we'd be calling it the 2001 depression by now.
posted by troy at 12:12 AM on September 22, 2008


The deflation angle is pretty frightening, and suggests that the bailout, no matter how large, really would do absolutely nothing.

On the other hand, a deflationary world is fun to think about. My student loans would be getting smaller every day; indeed, every dollar I borrowed today would be less than a dollar owed tomorrow. Having assets becomes a liability - wealth is constantly shrinking, so gaining wealth only makes sense if you can do it at a greater rate than that of deflation. Oh, inverted world!
posted by kaibutsu at 12:26 AM on September 22, 2008


My student loans would be getting smaller every day; indeed, every dollar I borrowed today would be less than a dollar owed tomorrow

actually debtors win in an inflationary regime and lose big in a deflationary world.

Those with savings love deflation. The world becomes a firesale.
posted by troy at 12:41 AM on September 22, 2008


Yeah. Given the choice between deflation and inflation, I know which would hurt me worse. I do know that they are both bad, generally speaking, though.
posted by Justinian at 12:54 AM on September 22, 2008


Deflation and moderate or high inflation are both bad, I mean. I gather that the supposedly best case is more or less constant low-level inflation. I assume because it discourages hoarding of cash or equivalent and encourages smart investment, thus greasing the wheels of capitalism.
posted by Justinian at 12:59 AM on September 22, 2008


Having worked for many years in the banking industry and been closely involved with risk management and derivatives, I can tell you that it looks like catastrophe is already here.

. . . .

Paulson is basically rolling you and the rest of Congress into giving him unprecedented power to protect his friends on Wall Street. This decision you are making is probably as momentous as the Iraq War resolution. Don't fall for this bailout disguised as the only way to prevent Armageddon. Armageddon is already here - at least for the big banks - and it needs an entirely different solution. Spend our money protecting us, by ensuring the FDIC is properly funded, by throwing these too-big-to-fail banks into bankruptcy if they truly are insolvent, by preserving the healthy parts of these banks while in bankruptcy, and bringing them back out again so they function under much better safety and soundness regulations. We've had airlines functioning properly and safely for years while in bankruptcy, and there is no reason we can't do the same with banks.

Please, please, do not fall for some useless compromise or bipartisan agreement that gives the administration what it wants in the end. Kill this proposal here and now, protect us from this bailout, and deal with the real problem - the insolvency of the major banks, not the paper that is supposedly blocking their lending capabilities.
posted by orthogonality at 2:13 AM on September 22, 2008 [3 favorites]


If you think we will ever see any of this money again, you're very, very optimistic. naive.

FTFY

posted by ornate insect at 5:50 AM on September 22, 2008


Load up your guns, call your friends.

But aren't they all cowards and idiots - which is to say, Americans?
posted by fleetmouse at 8:21 AM on September 22, 2008




Last Year's Big Five Wall Street Bonuses

"In 2007, Wall Street's five biggest firms-- Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley - paid a record $39 billion in bonuses to themselves."
posted by homunculus at 9:58 AM on September 22, 2008






If it weren't for the Fed pushing the monetary throttles to the firewall 2002-2004, we'd STILL be in the 2001 recession, only we'd be calling it the 2001 depression by now.

Finally. Somebody who gets it. After the dot-com bubble, the market, if left to run free, would have come all the way down until the S&P 500 had a P/E of between ~8-13, maybe. It only came down from the mid 40's into the mid 20's which is still above the top of every other P/E peak since 1880 *except* for the 1929 peak. In other words, stocks have been overvalued since 1998 or 1999 and have yet to retrace.

They will now.
posted by Rafaelloello at 12:05 PM on September 22, 2008


My student loans would be getting smaller every day; indeed, every dollar I borrowed today would be less than a dollar owed tomorrow.

No. That's what INflation is. Inflation is great for debtors, they pay back with money that is worth substantially less than the money they borrowed.

Deflation is the opposite. The dollars you borrowed and spent would have gone much farther(bought more) in the future. Too bad you don't have them any more.

In a few years an Ivy League education may cost what a Community College costs now. You can be the BMOC driving your Ferrari which costs the same as what a Honda used to cost.
posted by Rafaelloello at 12:12 PM on September 22, 2008


This is bad.
posted by lunit at 12:49 PM on September 22, 2008


This will become this generation's Treaty at Versailles (1919 version). Like that treaty it will bankrupt our nation, drive it into hyperinflation and be used as a touchstone for some future dictator to seize power.
posted by dances_with_sneetches at 1:53 PM on September 22, 2008 [1 favorite]


from http://georgewashington2.blogspot.com/2008/09/under-proposed-bailout-feds-could.html


Fact sheet:
The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets.


Observation:
So Paulson, in consultation with Bernanke, could “deem it necessary” to “stabilize” the financial markets by buying boat loads of gold. Or by cornering the market in uranium or platinum.

Or they could decide that they needed to buy Microsoft and Google.
posted by rough ashlar at 2:54 PM on September 22, 2008


This will become this generation's Treaty at Versailles (1919 version). Like that treaty it will bankrupt our nation, drive it into hyperinflation and be used as a touchstone for some future dictator to seize power.

You're a little off base. This will drive our nation into DEFlation. We will be the next China, perhaps. Manufacturing jobs at low wages to pay off our debts to the superior nations with the superior currency.
posted by Rafaelloello at 5:59 PM on September 22, 2008


We will be the next China Argentina, perhaps.

FTFY
posted by ornate insect at 6:35 PM on September 22, 2008 [1 favorite]


If this has already been posted here, I apoligize, I don't have time right now to roll through the thread. Over at Itulip, here is an interesting take from a University of Chicago professor.
posted by Eekacat at 7:01 PM on September 22, 2008


Manufacturing jobs at low wages to pay off our debts to the superior nations with the superior currency.

And that, after having first given away all those manufacturing jobs to the Chinese, so that the CEOs could haul in paycheques an order of magnitude greater than they used to be.

If those jobs come back to America, all y'all better get your shit together about unions. Unions are what made sure CEOs had only 10x the front-line pay instead of 400x. Made sure that companies provided healthcare coverage. Made sure that working weeks were a reasonable length, and that overtime was paid.

Otherwise, you will become the new Chinese.
posted by five fresh fish at 7:25 PM on September 22, 2008


Hmmm I must be Chinese, I work in a manufacturing job...
posted by Eekacat at 8:39 PM on September 22, 2008


Question for anyone:

What happens if the USA cancels the greenback? Simply refuses to consider it currency. Only valid bills are the new twenty, the new fifty, the new hundred. The economy gone for the shitter, chances are they become the new one, five, and ten.

It's known that North Korea has flooded the global market with counterfeit greenbacks. The CIA has done the same thing. What we're seeing is a forced crisis, created by a savvy financial market that has carefully extracted maximum profits from every dying dollar.

They're gonna convert as many American dollars into whatever Dubia-backed security has the sheik's guarantee, cancel the greenback, let the chips fall where they may. America, successfully looted.
posted by five fresh fish at 12:01 AM on September 23, 2008


five fresh fish: "195Question for anyone:

What happens if the USA cancels the greenback? Simply refuses to consider it currency. Only valid bills are the new twenty, the new fifty, the new hundred. The economy gone for the shitter, chances are they become the new one, five, and ten.

It's known that North Korea has flooded the global market with counterfeit greenbacks. The CIA has done the same thing. What we're seeing is a forced crisis, created by a savvy financial market that has carefully extracted maximum profits from every dying dollar.

They're gonna convert as many American dollars into whatever Dubia-backed security has the sheik's guarantee, cancel the greenback, let the chips fall where they may. America, successfully looted.
"

I'm unable to think through the ramifications of the above, but I have considered the possibility of avoiding a bank run by creating a reverse bank run, i.e. the US government says, "You have until this date to DEPOSIT all your greenbacks, after that they are null and void."

In other words, anybody who is hoarding cash will be forced to make their own liquidity infusion to the collapsing system.
posted by Rafaelloello at 4:10 AM on September 23, 2008 [1 favorite]


five fresh fish -- "What happens if the USA cancels the greenback? Simply refuses to consider it currency. Only valid bills are the new twenty, the new fifty, the new hundred. The economy gone for the shitter, chances are they become the new one, five, and ten."

Effectively, The United States would be defaulting. While we've never seen a developed nation default, we have seen various developing nations default - technically or outright, it's happened. We can gain some insight into what might happen in America by looking at a past default.

For example, in 1998 we went through The Russian Financial Crisis. Short term interest rates in Russia soared, hitting 150% at one point (Russian GKOs are the equivalent of our T-Bills).

Nobody would put their money into Russia (more properly, lend the Russian government money) unless compensated by a very high interest rate; after all, in finance risk and reward are proportional. Riskier investments have to pay (reward) more. At that time there were serious concerns about getting your principal back should you lend money to Russia (concerns that were later justified).

So if the US were even to do such a thing we'd probably see - given our relative importance in the financial world - short term interest rates of at least 150%, or perhaps even exceeding what we observed in Russia.

Why would this be important? Well, every week Treasury auctions off T-Bills. Effectively the United States is borrowing money from folks that purchase these instruments. Who would purchase our debt when we just canceled a boat load of the currency? The risk of holding US Government securities would skyrocket, overnight.

If the United States were to default on it's currency as suggested, folks would be very, very cautious about purchasing these T-Bills. Priced relative to these T-Bills is a wide range of debt, both public and private.

Borrowing costs for everyone would skyrocket. Businesses and even parts of the government would start to shut down.

It would be lights out America. At least until The Fed / et al well and truly clamped down.

Oh! And we'd get our credit rating downgraded as well.

But that's probably gonna happen anyway.
posted by Mutant at 4:20 AM on September 23, 2008 [1 favorite]


If those jobs come back to America, all y'all better get your shit together about unions. Unions are what made sure CEOs had only 10x the front-line pay instead of 400x. Made sure that companies provided healthcare coverage. Made sure that working weeks were a reasonable length, and that overtime was paid.

Otherwise, you will become the new Chinese.


What other option do we have?

We're competing with China now; every U.S. worker versus every Chinese worker. That's Globalization 101: there won't be "rich countries" and "poor countries," there will just be rich people and poor people. Rich people in China who are rich even by American standards, and poor people in the U.S. who will be poor even by emerging Chinese standards.

U.S. unions could demand healthcare and 5-day workweeks and anything else they want, but if they ask for much more than Chinese laborers do, they'll just find themselves unemployed. The only leg American workers have to stand on is the cost of transporting goods from China to market -- and as "the market" moves away from meaning "America", that's going to mean less and less.

We had an opportunity to prevent this when we were still the dominant market for goods; we could have restricted access to that market, and opened it up only to producers who met certain criteria, ensured an even playing field and minimum standards for workers. But there was never much of a chance of that, not when it might have meant fewer cheap imported goods at Wal-Mart. The opportunity is now gone, I think; the U.S. market is still substantial, but it's not big enough to be used as a bludgeon like it might have been once.

There's nothing left there but a race to the bottom; the only limiting factor is balancing the maximum exploitation of the populace against what will actually cause a revolution or massive destabilization. So we'll get our bread and circuses here and there, just like the people in China will.
posted by Kadin2048 at 7:04 AM on September 23, 2008


GDP is only about $14B and the national debt is running around $9T.

I'll assume that this is a typo because otherwise it's quite wrong and obviously so.
posted by Kwantsar at 9:20 AM on September 24, 2008


U.S. unions could demand healthcare and 5-day workweeks and anything else they want, but if they ask for much more than Chinese laborers do, they'll just find themselves unemployed. The only leg American workers have to stand on is the cost of transporting goods from China to market -- and as "the market" moves away from meaning "America", that's going to mean less and less.

Of course, the Chinese could unionize and do the same thing. Of course, when the Chinese tried to modernize their labor laws to allow more collective bargaining and freedom last year Western companies lobbied to stop it, eventually seriously reducing the scope of the new law.

So much for the idea that capitalism would open up china to more freedom.
posted by delmoi at 10:42 AM on September 24, 2008


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