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Thread: Financial and Economic Crisis

  1. #106

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    Among other economic articles compiled in the Ludwig von Mises Institute's Bailout Reader is a 2005 article that may prove especially interesting for WNY members.

    Skyscrapers and Business Cycles
    by Mark Thornton


    An excerpt:
    The skyscraper is considered an art form, but its construction is essentially a business that must pay heed to incentives and constraints and therefore skyscraper construction can be expected to closely follow even small changes in relative prices. In reevaluating the early skyscraper artistically, Huxtable (1992, pp. 23–24) noted:
    Essentially, the early skyscraper was an economic phenomenon in which business was the engine that drove innovation. The patron was the investment banker and the muse was cost-efficiency. Design was tied to the business equation, and style was secondary to the primary factors of investment and use…. The priorities of the men who put up these buildings were economy, efficiency, size, and speed.

    That is not to say that the early skyscrapers were without artistic merit, or that later structures failed to improve artistically, quite to the contrary. Nevertheless, post–World War I skyscrapers continued to emphasize profits and technology. The early skyscraper drew from existing technology and was considered an engine of innovation. Even in modern times, design continues to grow and evolve, but the "structural rationale for such a tall structure is technically and economically inescapable."[10] For Huxtable (1992, p. 105) "Architecture simply doesn't count…. With pitifully few exceptions in the past, New York's skyscrapers have never reached for anything but money." And while technology is certainly an awe-inspiring facet of skyscrapers, it should be remembered that the important technology of the first "skyscrapers" in the late 19th century was already available before the Civil War and that the basic "structural principles of the tall building, developed by the turn of the century, have remained essentially unchanged."[11] Art, technology, government regulations, and even ego must be considered, but the skyscraper is essentially a captive of economic forces and motives. Therefore when architects are asked what makes for the "super skyscraper," economic forces are considered preeminent, or as Robert Sobel meekly put it, "I think there are financial forces working to make this happen."[12]

    Changes in the rate of interest (the relative price between consumption goods and capital goods) can have three separate Cantillon effects on skyscrapers. All three effects are reinforcing and all three effects are interconnected to the transformation of the economy toward more roundabout production processes. When the rate of interest is reduced, all three effects contribute to the desire to build taller structures. The world's tallest buildings are generally built when there is a substantial and sustained divergence between the actual interest rate and the natural rate of interest, where the actual rate is below the natural rate as a result of government intervention. When the rate of interest increases, the financial effects all reduce the value of existing structures and the demand to build tall structures and when combined with depressed economic activity, the desire to build at all.

  2. #107
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    Quote Originally Posted by lofter1 View Post
    It seems that everyone is in agreement that the USA is suffering a disease labeled "Credit Crunch." This could leave the body of American business languishing in Intensive Care. By the end of this month (only days away) perhaps we will see big evidence of the American Malady as bills come due and payrolls must be met.
    The evidence is already in - we're in a recession. Spending across the board, by consumers and businesses, is falling. Housing still hasn't hit a bottom; in fact, the price decreases and (lack of) sales in August set new records. Widespread reports of small to medium size businesses getting their credit lines reduced, or being rejected for loans that only 6 months ago would have easily been given out, are now the norm. Fortunately, it seems that bigger, more established corporations have built up a significant stockpile of cash over the past few years that should get them through this storm. Smaller businesses, or even large ones with negative cash flows, won't make it - unless the government steps in with direct lending. The first candidates will be the ailing automakers.

    To save the ailing economy the Bush Administration wants a a "Bail Out" and says: Give us $700 Billion to infuse the patient and we'll sort it out. In response the Dems came up with a revised version where the patient is infused but more closely monitored.

    On the other hand the GOP Congressional types claim the patient -- the American Economy -- is essentially healthy, but has been poorly-treated. Therefore they propose a "Buy Out" plan and say: We'll put together a package (ala Warren Buffett's loan to Goldman Sachs) and that will free us up to put things in order and restore the patient.
    Actually I think you're confusing the plans. The GOP really hasn't presented a cohesive alternative; they're still "exploring options." It seems that there are more than a few supporters for a type of government-backed insurance fund to be targeted at bad debts. This is in stark contrast to the Democratic plan, which at this stage agrees to carry out Paulson's goal of buying bad assets off of bank with the added caveat of getting an equity stake in return. Given that many of these assets are nearly worthless, it amounts to a direct capital infusion to ailing banks.

    IMO the problem here is that Buffett gave an infusion to a mostly healthy patient (GS), while the GOP claims it has investors which will give a cash infusion to treat a toxic patient. However the patient the GOP is attending to is not the semi-healthy GS but rather a sick one that is riddled with terrible and perhaps valueless debt.

    Who are these potential deep-pocketed investors the GOP is thinking of? How much will they invest to save the patient?

    The GOP needs to come up with some big answers. And quick.
    The GOP doesn't have investors, and I don't think they're looking for them right now. That's what the Paulson/Bush/Democratic plan is counting on: that by setting up a government fund and running auctions, there will be a "price discovery" for the true market value of these assets. Investors won't step in before there's a clearly-defined price out in the open. The risk the government runs is in paying too much, which will prevent it from breaking even and will crowd out private investors who think the price is too high. This is a secondary, and arguably, much greater risk, because it's become clear (to me, at least) that even 700 billion isn't enough to get the job done. This puts more responsibility on the government for cleaning up the mess up until the very end, and almost guarantees the fund will run out of money too quickly.

    Doing nothing is, by every indication from all sides, NOT an option.
    I used to think this, but now I'm not so sure. The only truly good part about Paulson's announcement of a bailout last week was that it gave the markets a kind of time-out. I'd like to see this be prolonged for a little while, as long as people remain hopeful for a bailout. Why? Because it affords banks more time to raise capital themselves (which some are doing), and it also gives potential investors more time to determine prices.

    Here's the real problem. Since the government has already shown it will step in whenever a new crisis arises (note WaMu's seizure last night) and wipe out shareholders, as well as some creditors, it has discouraged private pools of money from making any real inroads themselves. Private equity has virtually no incentive to help recapitalize a bank if it thinks there's a 50/50 chance of being wiped out within a few months. Indeed, this is what happened to any groups who invested in WaMu or Lehman.

    The other "unknown" in the market is the short-selling ban: because of it, banks' market values are inflated, and as soon as the rule expires (Oct. 2nd I believe), there will be a steep selloff. The ad-hoc modification of rules has introduced so much uncertainty that it has become a self-fulfilling prophecy: since only the government controls its own actions, only the government knows the real risks of making an investment.

    Bottom line is, we're in for a nasty recession no matter what happens. If a bailout passes, there will be less chaos, and less lurching from one problem to another by Paulson et al. But given the limitations of the plan in its current form, it would be wise, IMO, to wait at least another week to discuss alternatives. Large-scale fiscal stimulus may work even better, depending on how much bad consumer/mortgage debt it will help people to pay off. Direct capital infusions to the banks may work too, but this introduces all kinds of moral hazards.

  3. #108

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    ^Good post.
    Quote Originally Posted by pianoman11686 View Post
    by setting up a government fund and running auctions, there will be a "price discovery" for the true market value of these assets. Investors won't step in before there's a clearly-defined price out in the open. The risk the government runs is in paying too much, which will prevent it from breaking even and will crowd out private investors who think the price is too high. This is a secondary, and arguably, much greater risk, because it's become clear (to me, at least) that even 700 billion isn't enough to get the job done. This puts more responsibility on the government for cleaning up the mess up until the very end, and almost guarantees the fund will run out of money too quickly.
    My understanding is that the 700 billion is "at one time" implying a sort of revolving bridge loan fund.

    Does the valuation happen after the Fed has assumed the securities -- and the bailed out company's debt obligation to the the Fed is written down accordingly?

    I agree the moral hazard here is atrocious -- the worse your investments were, the more largesse you receive. The equity requirements should be painfully punitive on the one hand, but too much of a stake will ultimately just lead to cronyism, corruption, and conflicts of interest in regulation. It'll be a mess regardless.

  4. #109
    Disgruntled Optimist lofter1's Avatar
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    Isn't the big problem going to be how to figure out the value of all those "mortgage-backed securities" (or whatever they're being called)? It seems they've been sliced and diced into smaller bits and then spread about to multiple buyers. The financial guys might have been so clever in disguising these things that there is no way to unravel them so that they can be accurately valued until you go one-by-one and check out each and every property.

    How is that done? And how long will that take?

  5. #110
    Disgruntled Optimist lofter1's Avatar
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    Quote Originally Posted by pianoman11686 View Post

    ... bigger, more established corporations have built up a significant stockpile of cash over the past few years that should get them through this storm. Smaller businesses, or even large ones with negative cash flows, won't make it - unless the government steps in with direct lending.
    Then wouldn't no bail out be a great situation for some big corporations?

    Seems that a lot of small cash-hungry entrepeneurial companies could get chewed up by the big guys -- and not because the smaller guys aren't doing well, but because the rules under which they've set up their business operations have been suddenly and drastically changed.

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    Quote Originally Posted by Jasonik View Post
    My understanding is that the 700 billion is "at one time" implying a sort of revolving bridge loan fund.
    If you take that to mean the government doesn't experience an outlay of >700 billion in the end, then I think you're right - except Congress wants to limit it to 250 billion (with pre-authorization for another 100 billion) at the beginning.

    Does the valuation happen after the Fed has assumed the securities -- and the bailed out company's debt obligation to the the Fed is written down accordingly?
    As far as I know, the Fed won't be assuming the securities; the new sovereign fund will. And price discovery is supposed to happen right before the transfer - when the system of auctions leads to either only one bid (from the government) or multiple bids (with the government's bid setting the price floor).

    I agree the moral hazard here is atrocious -- the worse your investments were, the more largesse you receive. The equity requirements should be painfully punitive on the one hand, but too much of a stake will ultimately just lead to cronyism, corruption, and conflicts of interest in regulation. It'll be a mess regardless.
    Not only that, but too much of a stake will also deter some troubled institutions from participating. That compromises the most important goals of the plan (mortgage restructuring, foregoing foreclosures, and resecuritization of mortgage lending) because, periodically, you'll have a bank failure that will disrupt the stabilization process.

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    Quote Originally Posted by lofter1 View Post
    Isn't the big problem going to be how to figure out the value of all those "mortgage-backed securities" (or whatever they're being called)? It seems they've been sliced and diced into smaller bits and then spread about to multiple buyers. The financial guys might have been so clever in disguising these things that there is no way to unravel them so that they can be accurately valued until you go one-by-one and check out each and every property.
    At this point, it's largely dependent on how the underlying assets are rated.

    Picture a collateralized debt obligation (of which many of these subprime/Alt-A loans form a part) as consisting of various layers of debt that each have a specific rating from a credit agency. The overall CDO's value then depends on the aggregate value of all the individual layers. The trick is in finding a held-to-maturity value for each rating, and in today's environment, applying some kind of discount to account for its lack of liquidity. So, for example, attach a value of 95 cents on the dollar for each AAA-rated mortgage, 90 cents for AA, 85 cents for A, all the way down to 15 cents for CCC, etc.

    How is that done? And how long will that take?
    It will all be done using computer models. There's no way to do it manually. The delay would lie in finding the 'best' computer model - either an existing one that seems most reasonable overall, or using pieces of different models for different grades/types of debt, and then creating a whole new supra-model.

    Bill Gross, the chief investment manager of PIMCO, has volunteered to do it for free.

  8. #113
    Disgruntled Optimist lofter1's Avatar
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    But isn't it now apparent that the big Rating Companies (Moody's and the like) were asleep at the wheel and didn't properly rate the now-toxic mortagages? And the plan would be to use those existing ratings?

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    They were asleep at the wheel, but so was everyone else. They issued ratings based on conditions at the time; securities were rated AAA as long as no one was defaulting on their mortgage payments. As problems have come up, ratings have been adjusted downward, and nobody wants to buy them. Securities now sit around and don't get traded - hence the illiquidity in the market, hence the writedowns at banks, hence the financial crisis.

    They're still the best-qualified to provide information, because that's their job. But I know there's distrust, which is why it's so important to come up with an appropriate discount rate. I assume the way around that is to build some kind of model that can predict where the housing market will bottom.

  10. #115

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    @pianoman

    Great explanation and summary.

  11. #116
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    Sold to US taxpayers for $700B: banks' bad assets

    By THE ASSOCIATED PRESS
    September 28, 2008
    Filed at 8:12 p.m. ET

    WASHINGTON (AP) -- Sold to American taxpayers for up to $700 billion: an unprecedented plan to buy distressed banks' least desirable mortgage assets.

    What started as a fairly simple three-page proposal giving the Treasury Secretary unchecked power to orchestrate a bailout of the country's financial system ended up as a complex rescue package, with enhanced congressional oversight, some added protections for taxpayers and a slap on the wrist to highly paid, underperforming executives.

    The ultimate goal of the plan remains the same: buy bad mortgage-related bets from weakened financial companies so they can raise fresh capital and resume normal lending operations to businesses, municipalities and consumers.

    Under the Emergency Economic Stabilization Act of 2008, which is expected to come to a vote in the House on Monday, the Treasury Department gets $250 billion immediately to start buying up banks' and other financial institutions' least valuable mortgages and complex financial instruments backed by those mortgages.

    If needed, an additional $100 billion is available at the discretion of the president, and a final $350 billion is on the table, unless Congress resolves to take it back. The president has the authority to veto such a resolution.

    The measure also proposes limited caps on the pay and benefit packages of companies who receive the government rescue, strengthens government oversight of the program and adds an insurance program for financial companies' bad assets.

    While Democratic negotiators made significant changes to the plan Paulson sent Congress a week ago, they did not get everything they had sought, particularly more help for troubled homeowners.

    House Republicans, meanwhile, fought hard for -- and won -- a provision that would establish a program whereby banks could buy government insurance to back the principal and interest on certain troubled assets, rather than selling them outright. They argued this was a better deal for taxpayers, and would reduce the overall cost of the rescue package.

    Treasury Secretary Henry Paulson told negotiators that he believed the insurance plan would have only limited benefits.

    While the plan broadly aims to prevent banks from profiting on the sale of troubled assets to the government, there is an exception made for assets acquired in a merger or buyout, or from companies that have filed for bankruptcy.

    This detail could allow JPMorgan Chase & Co. to sell toxic mortgages and other assets it gained control of last week when it purchased Washington Mutual Inc. for a higher price than the failed thrift paid for them.

    The government will only buy mortgage investments originated on or before March 14, 2008.

    Responding to the outcry of constituents, Congress structured the bailout in a way that sets limits on executive compensation at companies whose bad debt is purchased by the government. Lawmakers also established various oversight boards including one with members appointed by Congress and another whose members will include the Treasury secretary and the chairman of the Federal Reserve.

    Despite all the oversight and restrictions Congress added to Paulson's original proposal, the Treasury secretary will still have wide latitude in deciding such things as how to value the toxic assets and what experts to hire to run the program.

    Paulson, who lost in an effort to have his decisions exempted from congressional review, has indicated that he expects to use a type of ''reverse'' auction in which the companies with the winning bids will be the ones willing to take less, say 50 cents on the dollar rather than 60 cents on the dollar, for the assets.

    Private analysts said they believe the plan will give critical support to the financial system, helping to establish a vibrant market for hundreds of billions of dollars in mortgage assets that at the moment can't be priced because no one wants to purchase them.

    Brian Bethune, chief U.S. financial economist for Global Insight, a Lexington, Mass., economic consulting firm, said Sunday that he believed the bailout plan ''will provide some critical life support for the U.S. financial system, which has been hit by a very dangerous escalation in volatility in turmoil since early July.''

    Asked on CBS's ''60 Minutes'' Sunday night what the government will do if the $700 billion plan doesn't work, Paulson said, ''It's gotta do it and we're going to make this work and we're going to do what it takes to work.''

    Among the key segments of the bill:

    --EXECUTIVE PAY. Restrictions would be imposed on the compensation received by executives whose companies sell some of their bad assets through the government's purchase program. There would be tax restrictions on executive pay over $500,000 and limits on so-called ''golden parachutes'' for executives who leave the companies getting government bailouts.

    --OVERSIGHT. The Treasury will be required to provide details of its purchases of bad assets within two days of the transaction. Oversight boards would be created including one with members selected by Democratic and Republican leaders in the House and Senate and one that will include top government officials.

    --TAXPAYER PROTECTION. Taxpayers would be given ownership stakes in companies whose bad assets are purchased and after five years if the government is facing a loss in the program then the president will be required to submit a plan on how to recoup a portion of the losses from the companies that participated in the program.

    A proposal floated that did not make the final version of the bill:

    -- HELP FOR TROUBLED HOMEOWNERS. They failed in an effort to give judges the power to modify mortgage terms for people who have filed for bankruptcy and Democrats were unable to get approval for part of any profits the government might receive to go to help people facing mortgage defaults.

    Copyright 2008 The Associated Press

  12. #117

    Default The Rich Are Staging a Coup This Morning ...a message from Michael Moore

    Friends,
    Let me cut to the chase. The biggest robbery in the history of this country is taking place as you read this. Though no guns are being used, 300 million hostages are being taken. Make no mistake about it: After stealing a half trillion dollars to line the pockets of their war-profiteering backers for the past five years, after lining the pockets of their fellow oilmen to the tune of over a hundred billion dollars in just the last two years, Bush and his cronies -- who must soon vacate the White House -- are looting the U.S. Treasury of every dollar they can grab. They are swiping as much of the silverware as they can on their way out the door.
    No matter what they say, no matter how many scare words they use, they are up to their old tricks of creating fear and confusion in order to make and keep themselves and the upper one percent filthy rich. Just read the first four paragraphs of the lead story in last Monday's New York Times and you can see what the real deal is:
    "Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

    "Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

    "At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

    "Nobody wants to be left out of Treasury's proposal to buy up bad assets of financial institutions."
    Unbelievable. Wall Street and its backers created this mess and now they are going to clean up like bandits. Even Rudy Giuliani is lobbying for his firm to be hired (and paid) to "consult" in the bailout.
    The problem is, nobody truly knows what this "collapse" is all about. Even Treasury Secretary Paulson admitted he doesn't know the exact amount that is needed (he just picked the $700 billion number out of his head!). The head of the congressional budget office said he can't figure it out nor can he explain it to anyone.
    And yet, they are screeching about how the end is near! Panic! Recession! The Great Depression! Y2K! Bird flu! Killer bees! We must pass the bailout bill today!! The sky is falling! The sky is falling!
    Falling for whom? NOTHING in this "bailout" package will lower the price of the gas you have to put in your car to get to work. NOTHING in this bill will protect you from losing your home. NOTHING in this bill will give you health insurance.
    Health insurance? Mike, why are you bringing this up? What's this got to do with the Wall Street collapse?
    It has everything to do with it. This so-called "collapse" was triggered by the massive defaulting and foreclosures going on with people's home mortgages. Do you know why so many Americans are losing their homes? To hear the Republicans describe it, it's because too many working class idiots were given mortgages that they really couldn't afford. Here's the truth: The number one cause of people declaring bankruptcy is because of medical bills. Let me state this simply: If we had had universal health coverage, this mortgage "crisis" may never have happened.
    This bailout's mission is to protect the obscene amount of wealth that has been accumulated in the last eight years. It's to protect the top shareholders who own and control corporate America. It's to make sure their yachts and mansions and "way of life" go uninterrupted while the rest of America suffers and struggles to pay the bills. Let the rich suffer for once. Let them pay for the bailout. We are spending 400 million dollars a day on the war in Iraq. Let them end the war immediately and save us all another half-trillion dollars!
    I have to stop writing this and you have to stop reading it. They are staging a financial coup this morning in our country. They are hoping Congress will act fast before they stop to think, before we have a chance to stop them ourselves. So stop reading this and do something -- NOW! Here's what you can do immediately:
    1. Call or e-mail Senator Obama. Tell him he does not need to be sitting there trying to help prop up Bush and Cheney and the mess they've made. Tell him we know he has the smarts to slow this thing down and figure out what's the best route to take. Tell him the rich have to pay for whatever help is offered. Use the leverage we have now to insist on a moratorium on home foreclosures, to insist on a move to universal health coverage, and tell him that we the people need to be in charge of the economic decisions that affect our lives, not the barons of Wall Street.
    2. Take to the streets. Participate in one of the hundreds of quickly-called demonstrations that are taking place all over the country (especially those near Wall Street and DC).
    3. Call your Representative in Congress and your Senators. (click here to find their phone numbers). Tell them what you told Senator Obama.
    When you screw up in life, there is hell to pay. Each and every one of you reading this knows that basic lesson and has paid the consequences of your actions at some point. In this great democracy, we cannot let there be one set of rules for the vast majority of hard-working citizens, and another set of rules for the elite, who, when they screw up, are handed one more gift on a silver platter. No more! Not again!
    Yours,
    Michael Moore
    MMFlint@aol.com
    MichaelMoore.com
    P.S. Having read further the details of this bailout bill, you need to know you are being lied to. They talk about how they will prevent golden parachutes. It says NOTHING about what these executives and fat cats will make in SALARY. According to Rep. Brad Sherman of California, these top managers will continue to receive million-dollar-a-month paychecks under this new bill. There is no direct ownership given to the American people for the money being handed over. Foreign banks and investors will be allowed to receive billion-dollar handouts. A large chunk of this $700 billion is going to be given directly to Chinese and Middle Eastern banks. There is NO guarantee of ever seeing that money again.
    P.P.S. From talking to people I know in DC, they say the reason so many Dems are behind this is because Wall Street this weekend put a gun to their heads and said either turn over the $700 billion or the first thing we'll start blowing up are the pension funds and 401(k)s of your middle class constituents. The Dems are scared they may make good on their threat. But this is not the time to back down or act like the typical Democrat we have witnessed for the last eight years. The Dems handed a stolen election over to Bush. The Dems gave Bush the votes he needed to invade a sovereign country. Once they took over Congress in 2007, they refused to pull the plug on the war. And now they have been cowered into being accomplices in the crime of the century. You have to call them now and say "NO!" If we let them do this, just imagine how hard it will be to get anything good done when President Obama is in the White House. THESE DEMOCRATS ARE ONLY AS STRONG AS THE BACKBONE WE GIVE THEM. CALL CONGRESS NOW.

  13. #118
    Disgruntled Optimist lofter1's Avatar
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    As we await the vote by the House of Representatives ...

    Analyzing The Bailout: What's In It, Anyway?

    CLUSTERSTOCK
    Henry Blodget
    Sep 28, 2008

    What's in this massive bailout Congress wasted the whole weekend negotiating? We just wasted our Sunday evening reading all 110 pages to find out. (If you want to do the same, click here.)

    Key points below:
    • Creation of an "Office of Financial Stability." The bailout will be run via a new government office, which henceforth will be known here and elsewhere as The Bailout Office.

    • "Preventing Unjust Enrichment": Treasury can't pay more for the crap assets than the banks bought them for (a horrifying possibility, given that most of the securities have already been written way down). This provision, however, doesn't apply to banks who acquired the assets via mergers or to banks in bankruptcy or conservatorship. It also means that the Treasury can and will pay far more than market value for this garbage (and, thus, go against the advice of Warren Buffett and Bill Gross, among others, who recommend paying market prices).

    • Includes the silly "insurance" option the GOP insisted on--whereby the banks pay the government a fee to guarantee the performance of the toxic securities and then sells them to private-market buyers. The banks won't use the option because the payments would be onerous, and Paulson won't use it because he hates it. Go, GOP!

    • The Treasury is supposed to consider a bunch of factors when making its decisions, including:
      • Limiting how much the taxpayer gets screwed
      • Not wasting money buying assets from banks that will croak anyway
      • Save jobs, life savings, house values, etc
      • Try to save small banks that got blown up by Fannie/Freddie collapse
      • Protect retirement savings by buying the crap assets of pension funds, too

    • Oversight: Must report back to Congress after 60 days and then every 30 days thereafter. Must send Congress a report after every $50 billion spent.

    • Helping homeowners. Must try to work with homeowners to modify loans if/when appropriate to avoid foreclosure. Must encourage mortgage servicers to try not to boot people out of houses, instead working on ways to avoid foreclosures (toothless provision).

    • Executive compensation at bailed-out companies. Toothless: The plan ostensibly prohibits golden parachute payments to CEOs and other "C-level" execs at bailed-out companies. However, it really only prevents payments on severance deals that are struck AFTER the bailout (specifically, it prohibits these deals completely). There is nothing about cancelling the severance payments that the executives are ALREADY contractually entitled to. What this means in practice is that bailed-out companies will have trouble hiring the best talent...because why would you work at Bailed Out Company A when you could go across the street and get a fat severance deal? It also doesn't mean the companies can't pay their CEOs $500 million a year. IN ADDITION: There's another absurd section that makes all compensation above $500,000 for the three highest paid employees at the company not tax-deductible for the company. This is LUDICROUS. It means the company can pay the executives anything it wants and that the penalty for this will be exacted on the company and its shareholders. (Unless we're mistaken, Americans are furious that CEOs make $50 million a year for running companies into the ground, not that the $50 million is tax deductible).

    • The Treasury has complete discretion over the prices it pays for crap assets (the most important provision in the whole document as far as the taxpayers are concerned). "The Secretary make such purchases at the lowest price that the Secretary determines to be consistent with the purposes of this Act." Translation: If the banks persuade me they won't sell for anything less than a sweetheart price, I can give them that price. The only good news: The Treasury has to publicly detail the prices it pays. So if the Treasury is paying grossly inflated prices, the taxpayer has a chance of finding out about it.

    • Equity/warrants: The Treasury MUST be granted warrants or debt instruments (senior debt) from public companies in exchange for more than $100 million of bailout money. No specific language on how significant this warrant or debt position must be, except that it must "provide for reasonable participation by the Secretary, for the benefit of taxpayers, in equity appreciation in the case of a warrant, or a reasonable interest rate premium, in the case of a debt instrument." AND...must provide additional protection against taxpayer losses. This is an important and just provision. The tension will be between the government wanting to take enough equity to offset the risk without scaring the bank away.

    • Size: Treasury gets $250 billion now, and another $100 billion when the President tells Congress it is needed (i.e., now). If $350 billion isn't sufficient, the President can tell Congress he/she is authorizing another $350 billion, at which point Congress can issue a "joint resolution" to block it. In other words, the default amount is $700 billion, and Congress could conceivably block the second $350 billion (the rules for blocking it are complex and doing so wouldn't be a cinch).

    • Ability to stop the madness. Congress can seek a preliminary or permanent injunction from a court to stop the program.

    • TIME LIMIT: The authority under the plan lasts until the end of 2009. Congress can then extend for another nine months or so (max 2 years from the date of signing).

    • Oversight: A bunch of oversight provisions, including appointment of Special Inspector General.

    • VERY STRANGE AND POSSIBLY ALARMING: The SEC has the ability to suspend mark-to-market accounting for financial institutions when it thinks doing so is in the public interest. The SEC will also be launching a "study" of mark-to-market accounting. Mark-to-market has been fingered as one of the villains in this collapse. It isn't, but it sounds as though the SEC may have been persuaded that it is. Without mark-to-market, there's a lot more risk of a Japan-type scenario, where banks live in denial for years about how far up the creek they are.

    • Financial industry might have to pay for any taxpayer losses--emphasis on "might." Upon the expiration of the 5-year period beginning upon the date of the enactment of this Act...the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt.
    The good news: We didn't see any language about profits from the program being funneled into Democrat shell companies or other earmarks that were in an earlier draft. But it's possible we missed them.

    Copyright © 2008 Silicon Alley Media, Inc.

  14. #119

    Default

    More misery
    there will be no bail out yet
    Drudge Report has the house of reps voting it down..........

  15. #120
    Moderator NYatKNIGHT's Avatar
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    Default

    Rejected! Market plunges.

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