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Re: What does everyone think of the Bailout?
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Some of the terms of the AIG bailout for those interested (Point 1 & 2 are "old news" point #3 is the most interesting):

1. The government took control of AIG, agreeing to lend the firm $85 billion in return for preferred stock that represents a 79.9% equity interest (I.e. government now owns 80% of AIG)

2. Interest on the credit line will be based on the three-month London interbank-offered rate, plus 8.5%. (that's about 12% right now)

3. The company will pay a commitment fee on the credit line of 2% of the facility on the closing date, AIG said. And AIG will pay a commitment fee of 8.5% a year on the amount it does not draw down.

This is the kicker my friends! Right off the bat, they've just paid the government $1.7bn (2% of the $85bn) and even if they only use say $35bn of the credit line, they still have to pay 8.5% on the $50bn they DON'T use.

So is that a "bail out" or a big FU to AIG by the government?

Posted on: 2008/9/24 21:05
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Re: What does everyone think of the Bailout?
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From the 2008 Republican Party Platform: "WE DO NOT SUPPORT GOVERNMENT BAILOUTS OF PRIVATE INSTITUTIONS"

"We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself."

The 2008 Republican Party Platform, adopted earlier this month

http://www.gop.com/2008Platform/Economy.htm

Posted on: 2008/9/24 20:22
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Re: What does everyone think of the Bailout?
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AlexC - please explain to us what was non-factual in his assessment of things.


And everyone knows he's biased - did you read this line from his editorial:
"There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested."

Like perhaps PIMCO based in California - they'd be more than happy to evaluate these pools (for a fee of course)!

Might I add, he's the most successful bond investor in the country, perhaps the world - i think he might know a thing or two about the situation. But again, i would love to hear **ON THE MERITS** what is wrong with what he just argued?

Posted on: 2008/9/24 16:26
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Re: What does everyone think of the Bailout?
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"The writer is chief investment officer and founder of the investment management firm PIMCO."

For those who do not know who Bill Gross is, he's probably the one person who stands the most in losing personal fortune.

If course he'd say that. He's one of the biggest bloodsuckers in the planet.

Posted on: 2008/9/24 15:31
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Re: What does everyone think of the Bailout?
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How Main Street Will Profit (Op-Ed from Washington Post)

By William H. Gross
Wednesday, September 24, 2008; A23


Capitalism is a delicate balance between production and finance. Today, our seemingly guaranteed living standard is threatened, much like it has been in previous recessions or, some would say, the Depression. Finance has run amok because of oversecuritization, poor regulation and the excessively exuberant spirits of investors; the delicate balance has once again been disrupted; production, and with it jobs and our national standard of living, is declining.

If this were a textbook recession, policy prescriptions would recommend two aspirin and bed rest -- a healthy dose of interest rate cuts and a fiscal package that mildly expanded the deficit. That, of course, has been the attempted remedy over the past 12 months. But recent events have made it apparent that this downturn differs from recessions past. Today's housing bubble, unlike that of the stock market's before it, was financed with excessive and poorly regulated mortgage debt, and as housing prices began to tumble from the peak, the delinquencies and foreclosures have led to a downward spiral of debt liquidation that in turn led to even lower prices and more foreclosures.

And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.

In effect, the Treasury will have the fate of the American taxpayer in its hands. The Resolution Trust Corp., created in the late 1980s to deal with the savings and loan crisis, dealt with previously purchased real estate, which was flushed into government hands with a "best efforts" future liquidation. Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below "par" or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction -- financial derivatives -- that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards.

The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic. Democratic Party earmarks mandating forbearance on home mortgage foreclosures will be critical as well. If this program is successful, however, it is obvious that the free market and Wild West capitalism of recent decades will be forever changed. Future economic textbooks are likely to teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient over the long term when there is another delicate balance -- between private incentive and government oversight.

The writer is chief investment officer and founder of the investment management firm PIMCO.

Posted on: 2008/9/24 12:49
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Re: What does everyone think of the Bailout?
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tank ass wrote:

Quote:
With this public funding of 700 billion dollars towards the bailout, will all the Wall St. executives be forced to take a massive pay cut without any bonuses at christmas for putting this nation and world in this crisis ?


i was watching Tom BrokenJaw interviewing Bloomberg recently, I wanted to reach into the screen and smack him.

the interview went something like this:

Brokaw asked him, "so, once your term is over and you are no longer mayor, what do you plan on doing?"

Bloomberg makes this silly comment that he wants to take Brokaw's job, and then says, "everyone working here seems to be doing well, much better than my $1 a day salary as mayor."

Brokaw says, "Ok, but your net worth puts us all to shame."

Bloomberg says, "well.....it all goes to charity....," and then quickly changes the subject.

With all the money the rich have pilfered from the everyday american over the past 10 years, maybe you're right TankAss, maybe they should just cough some of it up to pay for this disaster, but in the end, I blame American people as well. Americans refuse to change their lifestyles or mentalities, and although there was no regulation with these banks for the loans they continued to sign, people gotta learn to live within their means. When you earn $60,000, don't live $80,000. We can only hope that at the very least, this bad turn of events will go down as a lesson learned for people who have no control over their spending habits, and that goes for the rich all the way down to the poor.

Posted on: 2008/9/24 11:28
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Re: What does everyone think of the Bailout?
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And who has been running the financial system???

Welfare mothers and the unemployed???

COME ON!!!!

Nobody wants to take Responsibility?

That is for Congress to try and fix in 2 minutes for a MESS YOU shit heads have dealt us over 10 years???

Nice.

Obama IS DEFINITELY NOW the next President.

Posted on: 2008/9/24 8:48
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Re: What does everyone think of the Bailout?
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Quote:

wibbit wrote:
Quote:

brewster wrote:

The problem is, the other side is saying the analogy is more like repairing a dam, if it goes it takes out every town below, so you gotta try to repair it even if structurally you're better off letting it fail and starting from scratch. But nobody knows how high the water behind the dam actually is, or how structurally unsound the dam is, so a informed choice is impossible.


that's a very good summary. ianmac47 is the guy who lives in the town a few miles away from the dam, he thinks he wont be affected by the flood, while in reality if the dam broke and the rest of the towns around it are flooded, he would be much worse off as well.


Or maybe I'm on the Ark waiting for the flood to wash away the sins of the world.

Posted on: 2008/9/24 4:37
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Re: What does everyone think of the Bailout?
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With this public funding of 700 billion dollars towards the bailout, will all the Wall St. executives be forced to take a massive pay cut without any bonuses at christmas for putting this nation and world in this crisis ?

Posted on: 2008/9/24 3:10
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Re: What does everyone think of the Bailout?
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September 23, 2008
Op-Ed Columnist
The Establishment Lives!
By DAVID BROOKS
Once, there was a financial elite in this country. During the first two-thirds of the 20th century, middle-aged men with names like Mellon and McCloy led Wall Street firms, corporate boards and white-shoe law firms and occasionally emerged to serve in government.

Starting in the 1960s, that cohesive elite began to fall apart. Liberal interest groups took control of Democratic economic policy. Supply-side think tankers and Southern conservatives dominated the GOP.

In the 1980s, the old power structures frayed, even on Wall Street. Corporate raiders took on the old business elite. Math geeks created complicated financial instruments that the top executives couldn?t control or understand. (The market for credit-default swaps alone has exploded to $45.5 trillion, up from $900 billion in 2001.)

Year followed year, and the idea of a cohesive financial establishment seemed increasingly like a thing of the past.

No more. Over the past week, Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and Tim Geithner of the New York Fed have nearly revived it. At its base, the turmoil wracking the world financial markets is a crisis of confidence. What Paulson, et al. have tried to do is reassert authority ? the sort that used to be wielded by the Mellons and Rockefellers and other rich men in private clubs.

Inspired in part by Paul Volcker, Nicholas Brady and Eugene Ludwig, and announced last week, the Paulson plan is a pure establishment play. It would assign nearly unlimited authority to a small coterie of policy makers. It does not rely on any system of checks and balances, but on the wisdom and public spiritedness of those in charge. It offers succor to the investment banks that contributed to this mess and will burn through large piles of taxpayer money. But in exchange, it promises to restore confidence. Somebody, amid all the turmoil, will occupy the commanding heights. Somebody will have the power to absorb debt and establish stability.

Liberals and conservatives generally dislike the plan. William Greider of The Nation writes: ?If Wall Street gets away with this, it will represent an historic swindle of the American public ? all sugar for the villains, lasting pain and damage for the victims.?

He approvingly quotes the conservative economist Christopher Whalen of Institutional Risk Analytics: ?The joyous reception from Congressional Democrats to Paulson?s latest massive bailout proposal smells an awful lot like yet another corporatist love fest between Washington?s one-party government and the Sell Side investment banks.?

Thanks to their criticism, the plan will be pinned back. Oversight will be put in place. But the plan will probably not be stopped. The markets would tank. There is a hunger for stability, which only the Treasury and the Fed can provide.

So we have arrived at one of those moments. The global financial turmoil has pulled nearly everybody out of their normal ideological categories. The pressure of reality has compelled new thinking about the relationship between government and the economy. And lo and behold, a new center and a new establishment is emerging.

The Paulson rescue plan is one chapter. But there will be others. Over the next few years, the U.S. will have to climb out from under mountainous piles of debt. Many predict a long, gray recession. The country will not turn to free-market supply-siders. Nor will it turn to left-wing populists. It will turn to the safe heads from the investment banks. For Republicans, people like Paulson. For Democrats, the guiding lights will be those establishment figures who advised Barack Obama last week ? including Volcker, Robert Rubin and Warren Buffett.

These time-tested advisers, or more precisely, their acolytes, are going to make the health and survival of the financial markets their first order of business, because without that stability, the entire economy will be in danger. Beyond that, they will embrace a certain sort of governing approach.

The government will be much more active in economic management (pleasing a certain sort of establishment Democrat). Government activism will provide support to corporations, banks and business and will be used to shore up the stable conditions they need to thrive (pleasing a certain sort of establishment Republican). Tax revenues from business activities will pay for progressive but business-friendly causes ? investments in green technology, health care reform, infrastructure spending, education reform and scientific research.

If you wanted to devise a name for this approach, you might pick the phrase economist Arnold Kling has used: Progressive Corporatism. We?re not entering a phase in which government stands back and lets the chips fall. We?re not entering an era when the government pounds the powerful on behalf of the people. We?re entering an era of the educated establishment, in which government acts to create a stable ? and often oligarchic ? framework for capitalist endeavor.

After a liberal era and then a conservative era, we?re getting a glimpse of what comes next.

Posted on: 2008/9/24 2:24
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Re: What does everyone think of the Bailout?
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wibbit wrote: that's a very good summary. ianmac47 is the guy who lives in the town a few miles away from the dam, he thinks he wont be affected by the flood, while in reality if the dam broke and the rest of the towns around it are flooded, he would be much worse off as well.
He could be flying over the town.

Posted on: 2008/9/23 23:40
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Re: What does everyone think of the Bailout?
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brewster wrote:

The problem is, the other side is saying the analogy is more like repairing a dam, if it goes it takes out every town below, so you gotta try to repair it even if structurally you're better off letting it fail and starting from scratch. But nobody knows how high the water behind the dam actually is, or how structurally unsound the dam is, so a informed choice is impossible.


that's a very good summary. ianmac47 is the guy who lives in the town a few miles away from the dam, he thinks he wont be affected by the flood, while in reality if the dam broke and the rest of the towns around it are flooded, he would be much worse off as well.

Posted on: 2008/9/23 22:03
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Re: What does everyone think of the Bailout?
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ianmac47 wrote:
Defending the bail out presupposes several things.

1. The collapse of the financial industry is necessarily a bad thing.
2. A preemptive bail out is the only or best solution.

I think neither of these points is true, and in fact, may ultimately damage the American economy in the long term.


So, if you think that something isn't true, you believe that the reverse IS true... So let me see if I understand you...

1) You're saying you think the collapse of the financial system is either a good thing or a neutral thing.
2) The proposal to purchase assets from financial firms is not a good idea? I.e. there is a better solution available.

Statement #1 is very strange indeed considering you live in Jersey City. The growth of this town over the last several years owes quite a bit to the growth in the financial sector. That sector collapsing is certainly not good news for residents of Jersey City: Less demand for housing, lower tax revenue, fewer jobs created, etc etc. I would love to hear how the collapse of the financial sector is not a very bad thing for this area...

In my view, should the financial system collapse foreign investment in this country goes away, hence, our government needs to offer much higher interest rates to attract foreign investment. Presumably, the dollar goes thru the floor as foreigners sell dollars and buy whatever else they can get. Think it's hard to get a mortgage now? Wait till interest rates go to 12%... Think it's a pain going abroad now, wait till 5 dollars buys you one euro. I'm glad you have your FDIC insurance, but if no one believes in the fiat currency, what good will it do you?

Statement #2 - If you think it's a terrible idea, let's hear your alternative solution...One that will actually address the underlying problem. Investing in infrastructure does not accomplish that goal.

Posted on: 2008/9/23 21:31
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Re: What does everyone think of the Bailout?
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I don't agree on using taxpayers money to rescue private entities. If we are to do that, the whole financial system should be nationalized. This will mean equity investors will be wiped out, but assets will be in some sort of government trust.

Posted on: 2008/9/23 21:30
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Re: What does everyone think of the Bailout?
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The way I look at the bailout is: bail out now or bail out later, and now is probably cheaper than later. As has been stated before the end result of the financial meltdown will be dire for everyone: a very cheap dollar, high inflation, hign unemployment and the decimation of everyone's savings (money market funds, stocks, bonds, insurance policies, retirement savings, etc). The government (at all levels) already has guarantees on a whole litany of people's financial assets. Money market funds were added to the list last week. When the meltdown comes, the government will have to make good on those guarantees and those sums are much larger than the $700 billion of this bailout.

The financial world depends on confidence (actually all of human activity depends on it) and that is what's lacking now and what the bailout is trying to address, to allow the financial system to realize its gains and losses and not just guess about what they may be.

Last week, when the market was melting down, I was about to cash out of my life insurance policy even though it meant paying a penalty because I was nervous that if my insurance company went bankrupt, it would be a real mess. I didn't do it because the bailout was announced shortly thereafter. All of you that oppose the bailout, I want you to pause for a minute and imagine what would happen if everyone, individuals, corporations, local governments, foreigners etc. all decide to bail out of the financial system at the same time. That's what we're talking about here.

Posted on: 2008/9/23 21:25
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Re: What does everyone think of the Bailout?
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The problem is, the other side is saying the analogy is more like repairing a dam, if it goes it takes out every town below, so you gotta try to repair it even if structurally you're better off letting it fail and starting from scratch. But nobody knows how high the water behind the dam actually is, or how structurally unsound the dam is, so a informed choice is impossible.


Yeah - did anyone see (Treasury Sec) Paulson on TV over the weekend? I found this commentary on Minyanville:

http://www.minyanville.com/articles/P ... reasury-TAF/index/a/19114

________

Much of this weird tension today stems directly from Treasury Secretary Hank Paulson's rounds yesterday on the Sunday morning news shows. His behavior was jarringly disturbing and erratic. On "This Week" with George Stephanopolous, Paulson could barely answer a single question without glancing nervously over his shoulder like a man who had just escaped from a medical detention center hurriedly explaining his side of the story to a passing motorist.

And what was his side of the story? Well, that is the awful crux of it. There was no side; there was simply "The Abyss." We have "narrowly avoided it," according to some. We have "stared into it and stepped back," according to others. Some say we have "faced it." Still others, that we "came within hair of plunging into it." But no one anywhere will say with any definitive completeness what, exactly, "The Abyss" is.

Shortly after Paulson disintegrated into a sweaty, jabbering mess under the TV lights on "This Week,' Senator Christopher Dodd (D-CT) and Representative John Boehner (R-OH) appeared.

"What is it will happen if we don't have this legislation?" Stephanopolous asked. It's a reasonable question. In fact, it's the only reasonable question.

The answer from Dodd and Boehner? Silence. Pressed, Boehner said, "You can't describe on Sunday morning how ugly this picture would look if we don't act."

"Why not?"

No answer.

Ok, we'll skip that part for now. How about this, will it work? Although unprecedented in magnitude, the solution proposed by the Treasury is hardly unique.

The TARP being proposed falls somewhere on the other side of both the Resolution Trust Corporation that was created to handle the Savings & Loan crisis in 1989 and the Reconstruction Finance Corporation created in 1932 to deal with massive bank failures and the inability to get credit into the economy.

How did markets respond to the Reconstruction Finance Corp. passage in 1932?


Click to enlarge

What about the RTC in 1989?


Click to enlarge

And today?


Click to enlarge

Keep in mind, the RTC came eight years into one of the the largest bull market in history. Know where the Dow and S&P 500 were eight years ago? 11,388 and 1255, respectively.

Posted on: 2008/9/23 21:20
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Re: What does everyone think of the Bailout?
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We don't know the solution but we've definitely identified the problem:

Posted on: 2008/9/23 21:18
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Re: What does everyone think of the Bailout?
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PAUL KRUGMAN wrote:

And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to ? a share in ownership, so that all the gains if the rescue plan works don?t go to the people who made the mess in the first place.

That?s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It?s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a ?clean? plan. ?Clean,? in this context, means a taxpayer-financed bailout with no strings attached ? no quid pro quo on the part of those being bailed out. Why is that a good thing?

I?m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad.


And this is what I meant when I said we'd read that this "plan" is a bad one pushed through at the tail end of a presidential election. Leave it to the Bush Administration to deal with every crisis by shoveling huge sums of our money into the coffers of corporations with little in return.

Posted on: 2008/9/23 20:48
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Re: What does everyone think of the Bailout?
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ianmac47 wrote:
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AlexC wrote:
Maybe they should let the whole thing happen in a quick car crash, (instead of a log-drawn-out slow motion blowup) then figure out where the money ought to be spent.


This is exactly what I'm arguing for. Another analogy is that of ripping off a bandaid in one painful tug rather than slowly peeling it back.


The problem is, the other side is saying the analogy is more like repairing a dam, if it goes it takes out every town below, so you gotta try to repair it even if structurally you're better off letting it fail and starting from scratch. But nobody knows how high the water behind the dam actually is, or how structurally unsound the dam is, so a informed choice is impossible.

Posted on: 2008/9/23 20:20
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Re: What does everyone think of the Bailout?
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AlexC wrote:
Maybe they should let the whole thing happen in a quick car crash, (instead of a log-drawn-out slow motion blowup) then figure out where the money ought to be spent.


This is exactly what I'm arguing for. Another analogy is that of ripping off a bandaid in one painful tug rather than slowly peeling it back.

Posted on: 2008/9/23 19:58
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Re: What does everyone think of the Bailout?
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It probably won't work and we'll be no better off a year from, and the federal government will be out $700 billion. Yay.


I agree with that.

This seems to be the opinion of those that are not directly invested in what the outcome will be.

Maybe they should let the whole thing happen in a quick car crash, (instead of a log-drawn-out slow motion blowup) then figure out where the money ought to be spent.

Posted on: 2008/9/23 19:52
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Re: What does everyone think of the Bailout?
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Cash for Trash

By PAUL KRUGMAN
Published: September 21, 2008
New York Times


Some skeptics are calling Henry Paulson?s $700 billion rescue plan for the U.S. financial system ?cash for trash.? Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There?s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself ? and for his successor ? to deploy taxpayers? money on behalf of a plan that, as far as I can see, doesn?t make sense.

Some are saying that we should simply trust Mr. Paulson, because he?s a smart guy who knows what he?s doing. But that?s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half ? a period during which Mr. Paulson repeatedly declared the financial crisis ?contained,? and then offered a series of unsuccessful fixes ? justifies the belief that he knows what he?s doing? He?s making it up as he goes along, just like the rest of us.

So let?s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities ? assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital ? too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven?t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the ?paradox of deleveraging.?

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might ? might ? break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn?t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms ? and their stockholders and executives ? a giant windfall at taxpayer expense. Did I mention that I?m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to ? a share in ownership, so that all the gains if the rescue plan works don?t go to the people who made the mess in the first place.

That?s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It?s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a ?clean? plan. ?Clean,? in this context, means a taxpayer-financed bailout with no strings attached ? no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review ?by any court of law or any administrative agency,? and this adds up to an unacceptable proposal.

I?m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I?d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don?t let yourself be railroaded ? if this plan goes through in anything like its current form, we?ll all be very sorry in the not-too-distant future.

Posted on: 2008/9/23 19:08
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Re: What does everyone think of the Bailout?
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wibbit wrote:
Like speaking to a brick wall, it is a BAD thing as others have explained - that's a fact.


Don't confuse fact with opinion.

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Maybe not the best solution, but do you have a better one?


Yes. Allow the meltdown to happen, and encourage it to happen quickly, and then rebuild in the aftermath.

Quote:

I hope this plan will work, because if it doesnt and the market continues to fall, i am really not sure what else anyone can do at that point.


It probably won't work and we'll be no better off a year from, and the federal government will be out $700 billion. Yay.

Posted on: 2008/9/23 18:58
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Re: What does everyone think of the Bailout?
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ianmac47 wrote:
1. The collapse of the financial industry is necessarily a bad thing.


Like speaking to a brick wall, it is a BAD thing as others have explained - that's a fact. Noone likes to assist private firms as it goes against capitalism, but doing nothing is far worse in this case. Our modern day financial systems are so interwined, having a systematic failure is not an option. Lehman gave a very small taste of what will happen.

You and all the lemmings think you are fine with your fdic insured 100k in the bank and cheers on the financial meltdown. But what you dont realize is once the big banks and insurer start to fail one after another and credit market freezes completely, many including maybe yourself will lose jobs, compounded by the fact a bottle of milk will start costing $10-15 as usd takes a nosedive and commodities skyrocket, then your 100k in the bank wont look so good anymore.

Quote:

2. A preemptive bail out is the only or best solution.


Maybe not the best solution, but do you have a better one? noone does. The idea behind this plan is to put a stop to the meltdown in progress and address the issue in the broad market. Because so far the government have only done it on a case by case basis and clearly these are only tactical solutions not strategic as it's not sustainable when more and more firms come under stress.

I hope this plan will work, because if it doesnt and the market continues to fall, i am really not sure what else anyone can do at that point. Diversify is the key, i have 30% of my holdings outside of the US and in foreign currencies, and plan to get that ratio close to 50%.

Posted on: 2008/9/23 18:38
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Re: What does everyone think of the Bailout?
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Defending the bail out presupposes several things.

1. The collapse of the financial industry is necessarily a bad thing.
2. A preemptive bail out is the only or best solution.

I think neither of these points is true, and in fact, may ultimately damage the American economy in the long term.

Posted on: 2008/9/23 17:42
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Re: What does everyone think of the Bailout?
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ianmac47 wrote:

And Washington Mutual and maybe even Wachovia would have collapsed too. But so what? Small depositors are insured by the FDIC, which was not the case until 1933.

Second, once the financial institutions collapsed, the federal government could have acted to infuse money into the economy without giving a dole to big corporations.


It's hardly that simple. Wachovia, Washington Mutual, Morgan Stanley, Goldman, Genworth Financial, State Street Global, and the list goes on and on were all teetering on the edge last Thursday... If all of those institutions failed then you get all the hedge funds, money managers, and insurance companies that have those people as their counterparties, now have no idea what their exposure is to those organizations, then they could fail and you get a domino effect...

Once you see that havoc play out, then you get foreign investors dumping their US Assets and more worrisome, they stop buying US treasury debt. It may suprise some people to know the foreigners hold, i don't know, over $4 trillion of our debt...If they start selling, I don't even want to think what that would mean: Drive our currency off a cliff, drive interest rates through the roof, and the list goes on and on.

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Instead of giving $700 billion to the people who created this mess through bad investments, the federal government should send the money directly into the economy by building things like bridges, mass transit, schools, hospitals and infrastructure. At least then the taxpayers actually get something for their investment.


It's a bit misleading to say you're "giving" the money to anyone - as wibbit pointed out, the money is being used to to purchase assets, in most cases at a significant discount to par. In many cases these bonds are being priced to some fairly arduous assumptions. In order for the bonds to lose as much value as the market is ascribing, we would truly have to enter into a new great depression...

Keep in mind that mortgage bonds are backed by actual houses and by promises by people to pay for those houses. In other words, the loans are collateralized by real assets. To say that the government's $700bn investment would be worthless in 2yrs is highly unlikely and would (again) require some extremely severe assumptions about the future economy.

Quote:

The bail out is paying for the mistakes of the American aristocracy while straddling the proletariat with their debt. Now the federal government is saying, "if you make risky investments, make sure you do it so wildly recklessly the entire economy will collapse, because then you will get free money." Where is the incentive to make smart investments if the federal government will hand over tax dollars every time you make bad decisions?


I agree that moral hazard is a serious problem. But don't you think that letting all these institutions fail will hurt the proletariat as well, not just the "aristocracy". Many of these people work for these institutions, many are vendors for these institutions, customers of them and the ripple effects through the economy could be quite unforeseen.

Something has to be done and building roads and bridges could certainly help employment, but it does nothing to fix our broken banking/financial system.

Posted on: 2008/9/23 17:02
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Re: What does everyone think of the Bailout?
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mfadam wrote:
Wibbit - I thiink the problem is valuing the assets. Wall St banks aren't playing nice with each other because they really don't know what value to put on the assets. Furthermore the structures are quite complex making pricing very subjective. If I were to bet on who comes out a winner in a trading competition between wall st sharpies versus the govt - my money is on the wall st sharpies every time.

I think the govt will get soaked on the deal. No different than RTC back in the early 90s. This problem was 20 years in the making as banks became less regulated, why hurry to "solve" it in a week? The whole thing is just the opinion of 2 people, whom I wouldn't say are totally impartial....


That's probably true in the past, but currently the banks are so desparate i really dont think the govt would be ripped badly(look at the most recent bailout of aig, govt made off like a bandit). Yes the govt may buy the asset above the true value at the moment(noone knows what it is, it's all mark to market crap), but eventually the market will revert to its means which means the govt will make a profit.

The key reason for me stating this is because the govt is the ONLY guy in town who can afford to hold these assets for a few years to turn it into profit, no other large banks has the capacity or approval to hold onto them and risk even the potential of a further small writedown.

ianmac47, you really dont have a clue, please stop.

Posted on: 2008/9/23 16:25
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Re: What does everyone think of the Bailout?
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Wibbit gets it right. The problem is so vast and so systemic that there needs to be a large coordinated approach in order to stave of a collapse of our financial system.

But i want to go back to the original tirade that started this thread. The post (which i'm guessing was just copied and pasted from this guy's blog) had so many inherent contradictions, it's hard to know where to begin:

Quote:

What Caused The Problem?
The Fed
Congress
Fractional Reserve Lending
The Treasury



I find it quite amusing that consumers are not part of this "what caused the problem" discussion. The fact that consumers took out loans they couldn't afford, continued to bid up housing prices and run deeper and deeper into debt - they don't deserve some of the blame for this? And what about lenders who offered them the loans? They don't share the blame? And what about investors who continued to buy these securities? I mean really, just because i *can* get a loan for a million dollars doen't mean i should!

This part also cracked me up (i put each statement on a seperate line for ease of reading):

Quote:

The problem is not a lack of liquidity,
it is not a lack of trust,
it is not lack of consumer confidence,
it is not subprime lending,
in fact the problem is not housing at all.

The problem is consumers and corporations are deep in debt with no way to service that debt.


The problem is all those things and on a scale that has never been seen before. I'm not sure if this writer doesn't work in the industry and therefore his lack of knowledge can be excused, but a few things are pretty clear: 1) if there were liquidity there wouldn't be a need for a $700bn vehicle to buy up bad debt, because you could sell to a private party 2) there is a lack of trust. Banks don't trust each other! 3)the author then says "The problem is not housing at all"? Really, are you kidding?

I will agree that consumers & corps have too much debt and some have limited means of servicing that debt - saying they ALL have that problem is just hyperbole. Not everyone was reckless but the reckless get rewarded and the rest get saddled with the problem.

The bailout scheme is a bit half-baked at this point. The overarching/nagging question will be what price will the government be buying these assets for? Set the price too high and you're overpaying and the government will be losing money and rewarding bad investment decisions. Set the price to low and no one will participate in the program and cause huge losses for the institutions you're trying to save... Classic Catch-22. I would encourage anyone who wants a better view on the subject to read Paul Krugman's assessment over at NYTime in a piece entitled "Cash for Trash" - it's a good read and not terribly political (but krugman's liberal colors do somewhat show thru beneath the surface).

I have plenty of other thoughts on the issue, but I'll pause for a deep breath...

Posted on: 2008/9/23 14:31
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Re: What does everyone think of the Bailout?
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AlexC wrote:
Dear Congress

Treasury Secretary Paulson is asking you to rush through a $700 billion package because "we?re literally maybe days away from a complete meltdown of our financial system".

Paulson states that it must be done quickly and that it is better than the alternatives. Fed Chairman Bernanke agrees.

The first question Congress should ask is how would Paulson or Bernanke know?

It was only a month ago Paulson was reiterating to anyone who would listen how sound our banking system is. The fact of the matter is that neither Paulson nor Bernanke saw this coming, yet now Congress is supposed to trust they now "know" the solution.

Problem Defined

Before one can work out a solution, the first step is to identify the problem. The problem is not a lack of liquidity, it is not a lack of trust, it is not lack of consumer confidence, it is not subprime lending, and in fact the problem is not housing at all.

The problem is consumers and corporations are deep in debt with no way to service that debt.

Attempts to bail out banks and brokers at taxpayer expense will do nothing but add to consumer debt, weaken the US dollar, and literally waste $700+ billion dollars that can and should go to more productive uses.

What Caused The Problem?



The Fed
Congress
Fractional Reserve Lending
The Treasury


The root cause of this problem is the Fed micromanaging interest rates, the Treasury cheerleading every step of the way, and Congressional sponsored spending that went wild. The critical issue that ties everything together is fractional reserve lending allows banks to borrow money (credit really) into existence with insane amounts of leverage.

To top it all off, Greenspan slashed rates to 1% fueling the biggest global housing bubble the world has ever seen. Congress needs to figure out a way to eliminate the Fed.

Fed Uncertainty Principle

I kindly ask of you to please read the Fed Uncertainty Principle written April 03, 2008 before any hint of this meltdown occurred. Here is Corollary Number Two.

Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Why The Paulson Solution Fails

The Paulson solution fails because it does not help consumers or businesses service debt, it does not create any jobs, it increases the national debt, and it encourages more reckless lending by banks. Attempting to bail out banks on the back of cash strapped consumers is simply doomed to fail.

If printing money was the solution to all problems, Zimbabwe would be the most prosperous country in the world.

The Barney Frank Non-Solution

"We're going to be buying up a lot of mortgage paper" said House Financial Services Committee Chairman Barney Frank.

Sadly, that will not do a single thing in and of itself to stop foreclosures. All that will do is bail out banks and brokers at taxpayer expense.

Barney Frank also stated ?We should be more willing to write down the mortgages. We?ll become the lender. The government will wind up in a controlling position so that we can reduce the number of foreclosures.?

Congress needs to ask "How much extra will Barney Frank's proposal cost taxpayers?"

Were does the madness end?

As stated earlier the problem is not housing in the first place, and besides taxpayers who pay their mortgages on time should not be subsidizing those who don't!

Banks Need To Recapitalize

Paulson wants to recapitalize banks so they can keep lending. Ironically, one of the problems is lending. The US has been on a credit binge to such an extent that I have to ask what more do we need? More Pizza Huts? More Home Depots? More Houses? More Nail Salons? More Car Dealers? What?

What is the urgent need to lend still more?

We are in this mess because of too much reckless lending. We do not need more lending, we need more saving!

Paulson's idea that more lending is needed is ass backwards. Paulson's proposal cheapens the dollar, and discourages the one thing that is desperately needed: saving.

Alternatives Discussed

In the mad rush to push through this package, Paulson states it is better than the alternatives. That is an interesting statement because no alternative have even been presented to Congress, let alone discussed.

Shouldn't there be a discussion of alternatives before doing a mad dash to sign a $700 billion package?

Paulson is attempting to hoodwink Congress to pass his plan without any discussion of alternatives. I believe the Paulson proposal is the worst of all solutions in that it bails out banks at the expense of the taxpayer and the taxpayer gets virtually nothing out of the deal: no jobs, no tax relief, no health care.

Paulson claims that taxpayer will benefit by the bailout indirectly because one the government owns the debt, servicers will be more willing to negotiate terms. Once again, it will be taxpayers on the hook for any negotiation granted. Paulson conveniently ignores this cost as does Barney Frank.

Taxpayer Gets Nothing From Current Bailout Proposals

The taxpayer gets nothing for this bailout $700 billion. Actually the taxpayer gets a negative benefit because the Paulson and Frank proposals will cheapen the US dollar, increase the deficit, and ultimately cause prices of imported goods to rise for everyone, while saving a relative few.

The solution is to address the recapitalization of banks in a fair way that does not jeopardize the taxpayer but instead puts the onus of responsibility on banks making reckless lending.

Recapitalizing Banks

Banks are undercapitalized. They need funding badly. Here is what I propose.


Reduce the capital gains tax by 50% for any investor willing to cash out stocks and invest in 5 year bank CDs.

Eliminate the difference between long term and short term capital gains.

Eliminate taxable interest on savings accounts, CDs, and US treasuries.

The above would promote saving rather over speculation and provide a big boost in government revenues as well. Stock prices will not be affected over the long haul by these measures.

Jobs, Jobs, Jobs

I am a libertarian. I do not believe in makeshift government proposals. However, I would rather get something than nothing for $700 Billion. Paulson's proposal scores a big fat zero in term of providing an jobs or any real economic stimulus.

It is no secret that infrastructure in the US is decaying and needs to be fixed. A collapsing bridge in Minnesota is one key example. And what out our aging energy grid? Instead of giving $700 billion to banks that deserve to go under, I would rather give half that for jobs programs.

To create as many jobs as possible at the least cost Congress needs to scrap the Davis-Bacon Act. It would be better to create 3 construction jobs at $12 an hour than 1 job at $36 an hour. The idea here is to get as most bang for the buck and create as many jobs as possible for the money spent.

Waste In Iraq

We need to admit the mistakes in Iraq. The public never supported this war and the public was correct. The war in Iraq easily cost $1 trillion dollars if you count future medical bills. That is $1 trillion dollars that could have been spent right here in the US.

I propose we declare the war won and get out, totally and completely. Offer returning veterans first crack at any infrastructure rebuilding jobs. It is the least we can do to those who are likely going to be emotionally if not physically scarred for the rest of their lives fighting a war that never should have been fought.

Congressional Spending

Congress needs to admit its own role in this mess. Congress passed hundreds of programs to make housing more affordable. They all failed including the biggest failure of all: Fannie Mae and Freddie Mac.

It should not be the role of Congress to promote housing vs. renting. The very act of doing so creates an artificial demand for housing. Ownership society madness culminated with many financially unqualified to buy a house buying house anyway because Congress and the White House promoted the idea.

Congress is also directly responsible for deficit spending and that weakened the US dollar. Indeed there was virtually a panic out of dollars for this reason. Adding another $700 billion to the deficit as Paulson is asking you to do is adding insult upon injury. Don't do it.

Instead balance the budget. It can be done.

span style="font-weight: bold;">Who Am I?

Who am I to suggest what Congress should do? I am nobody. However, this nobody and a bunch of fellow nobody bloggers and bunch of nobody fund managers who I respect all saw this all coming 3-4 years ago. Paulson did not, Bernanke did not, and almost everyone in Congress did not.

So the choice Congress needs to make is who to believe. Congress can believe Bernanke and Paulson who have been totally wrong about everything for years, or Congress can listen to people who not only understand what is happening but predicted it.

Desire To Believe

You desperately want to believe that Paulson and Bernanke are telling the truth. You have for years put your faith and trust in them. It is a very difficult thing to do to admit you are wrong.

However, it is critical that you look at the simple facts for what they are.

The fact is Paulson is grasping at straw in a tornado. So is Bernanke. Problems cannot be cured by printing money, and problems cannot be on the backs of already overburdened consumers.

No problem is fixed by madly and blindly rushing into solutions where no alternatives are discussed. You now have alternatives.

I will also offer one more alternative but it is not from me. I kindly ask Congress to consider An Open Letter to the U.S. Congress Regarding the Current Financial Crisis by John P. Hussman, Ph.D., an economist and investment manager whose opinion I trust.

Hussman too has an opinion as to how to address this issue without impacting the taxpayer. For the record, I have no idea what he might think of my proposal.

However, between the Hussman proposal and mine, I am sure there is fertile ground for further discussion and for doing something other than what I believe to be the worst possible alternative, the proposal submitted by Treasury Secretary Paulson.

No problem is too big that a solution has to be rushed into without considering the alternatives. I ask that you consider these alternative proposals either over an extended session or by letting the next Congress tackle the issue.

Heaven help us if recess is more important than taking the time to seriously consider all reasonable alternatives.

Sincerely

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com


WRONG, WRONG, WRONG !!!!!

CK

Posted on: 2008/9/23 14:26
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Re: What does everyone think of the Bailout?
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A metaphor for George W. Bush's entire life.

Bush 43: "Daddy, I screwed up and I need your help. I need to borrow $700,000,000,000".

Bush 41: "It's okay, son. We'll just bone the tax-payers and gas is still almost $4.00 a gallon so we'll be okay".

Posted on: 2008/9/23 14:06
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