September 28, 2008 11:04 PM   Subscribe

Here's the largest bank bailout in U.S. history that's being passed tomorrow.

I realize this isn't the best post. Just thought that comment in mefi would be something a lot of people would like to read and the sooner the better to get opinion on it.
posted by andywolf (43 comments total)

This post was deleted for the following reason: This is not the best post. You know this is not the best post. There's a lot of open financial threads already; please don't do this. -- cortex

rather then "passed" it should read "voted on".
posted by andywolf at 11:07 PM on September 28, 2008 [1 favorite]

A $700,000,000,000 picture.
posted by Effigy2000 at 11:07 PM on September 28, 2008 [2 favorites]

VOTED ON?! But nobody votes!
posted by TwelveTwo at 11:10 PM on September 28, 2008

And they all lived happily ever after.
posted by XMLicious at 11:21 PM on September 28, 2008

Phew! Well that's that crisis averted.
posted by PenDevil at 11:23 PM on September 28, 2008 [1 favorite]

The New Deal.
posted by 517 at 11:25 PM on September 28, 2008 [1 favorite]

Meanwhile, the front page story in China tells a different story.
posted by philip-random at 11:28 PM on September 28, 2008 [1 favorite]

Serious doubt that it will be passed. Isn't treason illegal?
posted by Sukiari at 11:43 PM on September 28, 2008

The New Deal.

Same as the old deal.

Fool me once, shame on — shame on you. Fool me — you can't get fooled again!
posted by oncogenesis at 11:43 PM on September 28, 2008 [1 favorite]

philip-random: The front page of the world section seems to be covering the $700b bailout sandwich that will feed us all through the coming depression.
posted by maus at 11:45 PM on September 28, 2008

The New Deal.

Same as the old deal.

Thanks for the reminder. This is suddenly completely relevant.
posted by philip-random at 11:47 PM on September 28, 2008

philip-random: The front page of the world section seems to be covering the $700b bailout sandwich that will feed us all through the coming depression.

Shit can change in 17 minutes.
posted by philip-random at 11:48 PM on September 28, 2008

Not a good plan. But sufficiently not-awful, I think, to be above the line; and hopefully the whole thing can be fixed next year. -- Krugman
posted by dhartung at 11:54 PM on September 28, 2008

Aww, America just bought itself a shameTARP.
posted by Rubbstone at 12:18 AM on September 29, 2008

America really needs to get back to exporting something other than debt.

Recently all the NAFTA, "Lexus and the Olive Tree" globalization-and-deregulation-are-good stuff has started to make sense to me when put into the context of sky rocketing consumer and national debt. Our economy has been looted.

It's like when the Electrolux plant closed near my town. Eletrolux was a manufacturer of consumer appliances that were sold all over the nation. When someone worked at Eletrolux they brought money into the local economy because their wages were paid from the proceeds of the sales of those appliances in other parts of the country.

When the plant closed down all the employees had to get jobs at places like Walmart and McDonalds. But Walmart and McDonalds don't have the same economic function that a manufacturer like Electrolux does. Instead of bringing money into the local economy, they siphon it out. All the sales are local and the wages of the employees are paid out the proceeds of those local sales after the cost of the imported merchandise and a percentage of profit has been skimmed off. After a while, the economy eats itself because the only way to bring outside money into it is through a credit card.

Now this is happening on a international scale.
posted by 517 at 12:27 AM on September 29, 2008 [2 favorites]

Wow Effigy2000, that picture is like something out of Brazil
posted by fullerine at 12:36 AM on September 29, 2008 [2 favorites]

After the heavy dose of new regulation in the agreement, New York will have a hard time claiming itself as the center of the financial universe. That title may have shifted to Washington ... or China.
posted by netbros at 12:39 AM on September 29, 2008

A shattering moment in America's fall from power ....How symbolic yesterday that Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees....An article by John Gray
posted by adamvasco at 12:43 AM on September 29, 2008 [2 favorites]

From adamvasco's link:

"Despite incessantly urging other countries to adopt its way of doing business, America has always had one economic policy for itself and another for the rest of the world. Throughout the years in which the US was punishing countries that departed from fiscal prudence, it was borrowing on a colossal scale to finance tax cuts and fund its over-stretched military commitments. Now, with federal finances critically dependent on continuing large inflows of foreign capital, it will be the countries that spurned the American model of capitalism that will shape America's economic future."
posted by bardic at 12:58 AM on September 29, 2008

Ah it's a fine post philip-random.

The markets aren't particularly thrilled with this news, but not panicking as some of the more sensationalistic British tabloids predicted over the weekend.

While The Nikkei closed down about 1.26%, The DAX is off about 1.77% and The FTSE is down about 2% as of 7:30 BST. Asian markets in general sold off with sharp declines across the region. S&P 500 Futures indicate about a 1.5% drop at the open.

We are still seeing Central Banks injecting cash into the interbank lending system; Japan and Australia last night pushed over $20B, while the ECB has now added some US style tools to their arsenal, offering "a special 38-day loan to provide eurozone banks with more cash in a bid to balance conditions on tense interbank money markets." (see earlier comments on tools such as the TAF, TDWP, TSLF added by The Fed under Bernanke to help manage the economy).

Speculation is growing of additional coordinated Central Bank actions in support of The Dollar while Barclay's capital see's a "perfect storm" brewing for Gold in the intermediate term.

Keep in mind that in general Central Bank interventions to support currencies don't work for long, as we saw with the Bank of England in 1992 when George Soros' Quantum Fund famously led speculative attacks on Pound Sterling, realising a one billion dollar gain and blowing England out of the ERM (the forerunner of The Euro). So this will be interesting to watch.

In European news, Fortis received capital injections over the weekend, selling a 49% equity stake to the Dutch, Belgian and Luxembourg governments.

A tangible illustration of just how ill-liquid certain market segments have become:
"The company said that it has written down 78 percent of the value of "collateralized debt obligation" CDOs it wrote itself."
Absolutely amazing. As a CDO is composed of one or more tranches, and each tranche itself containing tangible assets - e.g., (but not always) a mortgage or other type of loan - its difficult to reconcile this action with what we know of the European lending market. Specifically, and with only a few exceptions (i.e., Spain) property values have fallen on The Continent but not that much. And while Euro Zone default rates across the board are up slightly, they aren't exactly surging. If those structured products are indeed sold at that price someone is gonna make a boatload of money. If they keep the derivatives on their balance sheets Fortis and their partners (the three governments noted earlier) are gonna make a boatload of money. Interesting.

As much as this progress is good progress, the market seem very nervous still. A good indicator to watch overall if The TED Spread , which widens as folks lose confidence in the markets. Currently we're seeing The TED Spread trade at roughly 2.92%; compare to about 1.10% a month ago.

Still, folks are relatively calmed as the TED Spread traded at a record 3.13% on September 18th.

Anytime we see a so-called "flight to quality" I'm reminded of the classic Mark Twain quote -- "I am more concerned about the return OF my money than the return ON my money."

netbros -- "After the heavy dose of new regulation in the agreement, New York will have a hard time claiming itself as the center of the financial universe. That title may have shifted to Washington ... or China."

Possibly. But the fundamental problem, as I see it, is the US style of market regulation.

In the UK (and other regimes, for instance), we see principles based regulation. The spirit, not the letter of the law is dominant.

In America we've got a system that is largely rules based. Letter of the law.

This difference leads to incredibly large rule books in The United States, and the inevitable existence of loopholes that can be exploited. Loopholes are only closed by the addition of additional rules, thus leading to a far more denser rule book.

While I'm in favour of regulating The Credit Default Swap Markets, I'm afraid that at present I don't see SEC as being terribly effective here. And The State of New York can make all the noise they'd like about regulating these markets, but until speculation (not hedging) with Credit Default Swaps is no longer allowed, conditions are ripe to see another bubble in this market.

Folks have to keep in mind that derivatives are simply tools that when used properly add substantial value to the Capital Markets. When wildly used for speculative purposes derivatives are potentially destructive. As we've all seen over the past few weeks.

Thanks for posting the link philip-random!
posted by Mutant at 1:00 AM on September 29, 2008 [6 favorites]

Amusingly - viewing this post without logging in gave me this targeted ad.
posted by isol at 1:01 AM on September 29, 2008

I cannot fucking believe that they did not define precisely the pricing procedures
posted by matteo at 1:02 AM on September 29, 2008

Mutant: We in the UK appear to be undergoing a similar crisis to that in the USA, with banks overstretched from lending to a property bubble. I'm not sure the difference regimes are that significant. Of course, it might just be that our banks are overstretched from lending to your property bubble - I don't know enough about the system.

In addition, in business taxation at least, we've progressed over the last ten years towards a much more extensive rulebook (as you describe the US system) thanks to Brown and his attempts to simultaneously (1) cut the headline rate of corporation tax and (2) keep the tax take up by squeezing tax planning and (3) micromanage the economy through the taxation system.
posted by alasdair at 1:14 AM on September 29, 2008

matteo -- "I cannot fucking believe that they did not define precisely the pricing procedures"

Yeh, I looked for that as well; apparently they've got some time to get their pricing mechanisms in place - at little wriggle room is being request -- "Before the earlier of the end of the 2-business-day period beginning on the date of the first purchase of troubled assets pursuant to the authority under this section or the end of the 45-day period beginning on the date of enactment of this Act, the Secretary shall publish program guidelines, including the following: 1. Mechanisms for purchasing troubled assets. 2. Methods for pricing and valuing troubled assets."

But this one is troubling; keep in mind that much of what pushed off the current mess is FAS 157.

Last January I mentioned the impact this accounting regulation would likely have on Level 3 assets in general and banks balance sheets specifically, so the Secretary (to adopt their language above) is now looking for the Authority to Suspend Mark-to-Market Accounting (FASB 157).

Wow. I gotta think about this more. On the surface I'm not sure this is a step forward.

alasdair -- "In addition, in business taxation at least, we've progressed over the last ten years towards a much more extensive rulebook (as you describe the US system)..."

Fair enough on business taxes, but I was discussing key differences between how the SEC (US) and the FSA (UK) [.pdf] regulate the capital markets.

Even staff at The SEC are arguing to replace the rules based system with a principles based approach [.pdf]

As the markets grow in complexity rules based systems just don't scale.
posted by Mutant at 1:32 AM on September 29, 2008 [2 favorites]

The plan would impose some curbs on executive compensation at firms that sell assets to the government. These include a ban, for those that sell a large amount of securities to the U.S., on creating new "golden parachute" payments to departing top executives....

The Treasury would receive warrants giving it the right to acquire nonvoting common stock or preferred stock in firms benefiting from the bailout. The program would be subject to oversight that includes a bipartisan committee and the Government Accountability Office.

Can someone who has a clue here (that is, not me) confirm my reading of that, that this is pretty much the best-case deal of the options discussed last week?

I realize that the executive compensation thing is a feel-good add-on, but this deal seems to now include both equity and oversight, which were the two biggest scary missing bits last week, right?

I know it was the whole "Paulsen's decisions may not be reviewed" thing that made my red lights blink.
posted by rokusan at 1:52 AM on September 29, 2008 [1 favorite]

There was a conference call with SIFMA last night. SIFMA is a securities industry group.

The call was from the Treasury Department to give a briefing on the bailout and how it will be used, given directly to the trade group. There were discussions on how to bypass some of the limitations, such as CEO compensation.

This is a money trough for those that got us into this mess in the first place. No real Oversight, no real teeth, no real regulation. Very disappointing.

Liveblog of Call

Commentary on Call (Scroll down for more responses)

MP3 of Call - Direct Link

Youtube MP3 Part1
Youtube MP3 Part2
Youtube MP3 Part3
Youtube MP3 Part4
Youtube MP3 Part5
posted by Lord_Pall at 1:59 AM on September 29, 2008 [2 favorites]

...doom doom doom doom-doom doom doom doom doom doom-doom doom doom doom-doom-doom doom doom doom doom-doom doom doom-doom DOOM doom doom doom doom-doom-doom doom doom doom doom...
posted by loquacious at 2:01 AM on September 29, 2008

OMG the Chinese are going to take over the moon. Ten years from now we'll all be getting all our toys and furniture and all manner of cheap crap from Jap ... oh, China. (Japan paranoia is ever-so 1980s.)
posted by raysmj at 2:50 AM on September 29, 2008

rokusan -- "...that this is pretty much the best-case deal of the options discussed last week? "

Not that I've got any more of a clue than anyone else perusing this document today, but I'm reading it the same way as yourself.

My concern would be the equity offered; I don't think Treasury should be holding preferred shares, simply because of the upside cap (being a debt / equity hybrid, usually preferred lags common in pricing moves to the upside). And "non voting"? Well, if Treasury is getting into the property business in as big a way as this document seems to imply, then I don't see what wrong with holding voting shares.

Besides, as sharp as Paulson is most of the time when The Fed or pretty much any other agency deals directly with a bank, the government ends up on the wrong side of the trade.

I'm not sure this will end up any different, and non voting shares seems to imply the creation of a distinct issue that may actually lag in performance for one reason or another. Some folks (rightfully!) call me suspicious, but I like to keep things simple, as the markets are complicated enough.

Sec. 105. Reports needs to be beefed up a little.

I'd like to see some idea of why they acquired a position, and what their expected return on the asset it. No doubt most of the information is there, but the Secretary should be obliged to explain which of the purchased assets will show a positive return and which won't. And for those that are expected to generate a loss, The Secretary must explain why this asset was acquired.

Sec. 109. Foreclosure Mitigation Efforts is very light on details where it matters most, especially so "the loan modification and restructuring process".

And this seems unnecessarily broad and open ended -- "In the case of a mortgage on a residential rental property, the plan required under this section shall include protecting Federal, State, and local rental subsidies and protections, and ensuring any modification takes into account the need for operating funds to maintain decent and safe conditions at the property." -- holy shit so this program is now proposing to not only acquire but also maintain property? Wow.

Sec. 112. Coordination With Foreign Authorities and Central Banks. gives the Secretary authority under Sec. 101 to purchase foreign assets. Curious.

Sec. 115. Graduated Authorization to Purchase. isn't strong enough for my tastes. I'd like to see a checkpoint taken here and quantitative metrics in place to insure the program is having a positive and beneficial impact with funds already spent, before more money is deployed.

I saw some interesting Citibank research (dead tree so can't link) where they think $200B tops would have the desired effects, if deployed properly.

I think this thing is very shaky from the start if they can't put a scorecard in place showing very clearly progress made / not made. Sec. 105 is already somewhat deficient in this regard.

And it should be something as simple as The Debt Clock; if ordinary Americans are paying for this then reporting should be clear, transparent and easy for those without specialised financial training / expertise to understand.

Sec. 116. Oversight and Audits is particularly interesting.

GAO is being invited in, good. Treasury must pay GAO's costs -- "The Treasury shall reimburse the Government Accountability Office for the full cost of any such oversight activities". Wonder what this is anticipated to total?

Controls according "the standards prescribed under section 3512(c) of title 31, United States Code" -- 3512 is explained here. So they're not reinventing the wheel and using existing mechanisms - good.

typo - "3. REPORTING.The Comptroller General shall submit reports of findings under this section, regularly and no less frequently than once every days," -- how many days was that?

Sec. 117. Study and Report on Margin Authority -- "STUDY.The Comptroller General shall undertake a study to determine the extent to which leverage and sudden deleveraging of financial institutions was a factor behind the current financial crisis."

I don't think this is appropriate. They should be FORWARD LOOKING. Not backward. And its difficult to both.

The body fixing the problem shouldn't also be charged with looking back and figuring out what happened. Too much of a risk that they'll overlook something, they don't have the objectivity. I don't understand why they are proposing this. A distinct body should be appointed to drive this, much like NASA did with Challenger. A special committee was appointed to look into the what happened, while NASA incorporated findings and fixed The Shuttle.

Sec. 118. Funding -- "...the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code..." - Chapter 31, Title 31 refers to public debt and is explained in detail here. Basically, they're gonna sell some T-Bills to finance this thing.

Sec. 123. Credit Reform - this is an interesting section. It mentions "... the cost of troubled assets and guarantees of troubled assets shall be calculated by adjusting the discount rate in section 502(5)(E) (2 U.S.C. 661a(5)(E)) for market risks;"

while we know that 502(5)(E) (2 U.S.C. 661a(5)(E)) states "In estimating net present values, the discount rate shall be the average interest rateon marketable Treasury securities of similar maturity to the cash flows of the direct loan orloan guarantee for which the estimate is being made.".

So I bet they're gonna use the 30 Year to discount what they're acquiring. Restructure whatever ends up on their balance sheet as a 30 Year mortgage and you've sharply reduced the value (impact). Interesting.

Sec. 129. Disclosures on Exercise of Loan Authority. -- "PERIODIC UPDATES.The Board shall provide updates to the Committees specified in subsection (a) not less frequently than once every 60 days while the subject loan is outstanding..."

I don't particularly like this; why not report - publicly at least - every week? Banks have to reconcile their books far more frequently than every 60 days. I'm not sure what they're trying to gain here, as no doubt they'll be watching this closely and know what's up with their portfolio by the close of business every day.

This is a non-starter -- "CONFIDENTIALITY.The information submitted to the Congress under this section may be kept confidential, upon the written request of the Chairman of the Board,...".

It comes down to this - you guys want the money or not?? Then we want full transparency, no if and or buts about it.

Sec. 131. Exchange of Stabilization Fund Reimbursement. -- "The Secretary shall reimburse the Exchange Stabilization Fund established under section 5302 of title 31, United States Code, for any funds used for the temporary guaranty program for the United States money market mutual fund industry, from funds under this Act."

When this creep in? Seems to be widening the original purpose of the TARP.

Sec. 133. Study on Mark-to-Market Accounting - oh this is a good one -- "the process used by the Financial Accounting Standards Board in developing accounting standards;"

We know that lots of people are angry with FASB because of FAS 157. Now the sharp knifes are out. Wow.

"...alternative accounting standards to those provided in such Statement Number 157."

Well, there are viable alternatives, such as those we already use to price ill-liquid bonds e.g., create a pricing matrix and price relative to observed market prices for more liquid securities. No brainer, we teach the technique to first year Masters students at University these days.

Currently we've transitioned from one extreme - market to model - to another - mark to market. The latter, of course, largely led to the current problems.

This will be interesting to see how it shakes out. Matrix pricing is widely used and accepted, and could be a viable substitute to price CDOs and other Credit Derivatives. After all, some CDOs are now trading as though we've observed default rates of almost 90%!

Which we know isn't true.

Ha very interesting proposal. Wish I had more time to plow though in detail. Thanks again for the link.
posted by Mutant at 2:57 AM on September 29, 2008 [22 favorites]

700 billion is the new over 9000
posted by L.P. Hatecraft at 3:22 AM on September 29, 2008 [1 favorite]

The markets aren't particularly thrilled with this news...

I'm not particularly thrilled with the provision that new golden parachutes are prohibited, and only those of companies that misrepresented earnings will be "clawed back" - whatever the Hell that winds up meaning.

Theft on a grand scale.
posted by Kirth Gerson at 3:51 AM on September 29, 2008

Currently we've transitioned from one extreme - market to model - to another - mark to market.

The mark in this case being the taxpayer, of course.
posted by Kirth Gerson at 3:53 AM on September 29, 2008 [3 favorites]

I was thinking bail out meant like taking a bucket and throwing the water out of a sinking ship but my friend said it was like giving money to a bondsman so you don't go to jail.
posted by Bitter soylent at 4:05 AM on September 29, 2008 [1 favorite]

To celebrate, I'm going to break out my 1997 copy of Wired Magazine, the one with the big yellow smiley face on the cover and the feature article: "The Long Boom: A History of the Future, 1980 - 2020 (By Peter Schwartz and Peter Leyden)... We're facing 25 years of prosperity, freedom, and a better environment for the whole world. You got a problem with that?"
posted by Auden at 5:18 AM on September 29, 2008 [2 favorites]

Jesus Christ, this is a nightmare.

1) The restrictions in spending? (Sec 115) Moot. For one thing, it still says "Outstanding", which means the Treasury can just buy, then sell, then buy again. Secondly, the "firewalls" in place are meaningless. They start at $250B, they need Presidental Approval to get to $350B (which will probably occur on the signing statement) and if they want the rest, they just have to wait until Congress isn't in session!

2) Mark to Market gone. (Sec 133). This is lethal. The reason that Japan went into the decade long slump? They wouldn't let the bubble purge. Banks marked assets to model -- or to myth -- and stayed technically solvent when they were flat broke.

The *only* was to fix a bank crisis is fast and hard. You gut the bad assets, recapitalizes, and relaunch. The Nordic Countries did this in the early nineties. We did this -- in the face of a massive collapses of the banking industry -- in the mid 30's.

This shows me that this bill is a bailout for the large wall street firms, not the banking system.

Sec 133 takes a bad bill and makes it a nightmare. It is still based on bailing out banks who made bad bets by buying worthless assets at well over market price (and we're the ones who will eat the loss) but then it compounds this by letting the rest of the banks simply lie about what those assets are worth.

Japan tried just this trick -- they didn't force banks to honestly evaluate assets, so dud assets stayed on the books -- marked at a value such that the bank didn't 'fail', but the banks were then useless. The only way to get working capital was to sell assets that wouldn't sell.

No. This has to be stopped.
posted by eriko at 5:32 AM on September 29, 2008 [2 favorites]

And Wachovia goes "poof"...
posted by billysumday at 5:35 AM on September 29, 2008

Mi$$ion Accompli$shed!
posted by jkaczor at 5:43 AM on September 29, 2008

Jim Cramer had the CEO of Wachovia on his show last week trotting out the ol' everythings-fine-keep-buying-our-stock line. Oops.
posted by PenDevil at 5:52 AM on September 29, 2008

If only we could have a bailout from all these posts, amirite?
posted by Eideteker at 5:52 AM on September 29, 2008

Jim Cramer is an insane lunatic. He's literally a crazy person. It's criminal that he has ANY airtime on any channel anywhere - let alone CNBC.
posted by Auden at 6:03 AM on September 29, 2008

Seven page section-by-section summary.

If that's too long for you, one page summary.
posted by smackfu at 6:08 AM on September 29, 2008 [1 favorite]

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