Talking your way out of the deal of the century

Here's the deal. You and your wife have lost your jobs and you've also lost your life savings with some really bad gambles in the markets. You are very likely going to lose your cars, your home, and everything that you own.

Suddenly, Hank Paulson calls you up and says, look, no worries. We'll spend up to 50 million to buy those crappy investments off of you, allow you to get back up on your feet and get going again.

This, however, isn't good enough for you. It isn't enough that the government will buy the crappy securities at their nominal market value of $3,000,000 dollars. It isn't even enough that they will buy them from you for a premium, giving you a wash on the deal, at $17,000,000 dollars. Nope, they made the mistake of mentioning $50,000,000.

So now, you get a wink, wink, nudge, nudge from Paulson but that pesky Congress might get in the way. So you, and your other friends in "The Incredibly Poor Judgement Investment Club" who got this offer, now have your lobbyists attack, saying we need whatever we say we need. There can be no oversight. Only we know what can help us. All the while keeping your eyes on that big fat top end number.

That folks is what is happening right now. The banks, having been handed a golden goose, now want a golden calf. And they'll keep the goose too, thank you very much.

It is no longer a question of whether the governent will give it to them. We already have the standard 'pass it or else' line from the White House. The question now is whether Congress will give it to them. Given Congress' record of passing the buck and voting for the allowance of sweeping executive discretion in such things as the war on Iraq and FISA, I, sadly, have remarkably little faith that Congress will do what it should.

I am, also, not alone in either thinking that this proposal from Hank Paulson is both too sweeping and not accountable enough.


Continue reading "Talking your way out of the deal of the century"^>>
As early as Saturday, as details started leaking out, many started jumping off the ship. Josh Marshall at TPM on Saturday night:

Mulling this more and listening to the insights in your emails, the key clearly is how much the government pays for these distressed assets. They may be bad debts. But that doesn't mean they have no value at all. Bought at the right prices and given time on the books -- which the government is uniquely in a position to allow them to do -- the government could even turn a profit on some of them. But the key is at what price they're bought and whose get bought. That seems like precisely the kind of process that requires oversight and accountability to make sure the taxpayer doesn't get fleeced.

Paul Krugman was ambivalent about all of this when I saw him on Real Time with Bill Maher on Friday night. He was no longer ambivalent by Saturday afternoon:

Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

Part of the reason everyone is becoming increasingly uneasy is because of things like this in Sunday's New York Times:

The scope of the bailout grew over the weekend. As recently as Saturday morning, the Bush administration’s proposal called for Treasury to buy residential or commercial mortgages and related securities. By that evening, the proposal was broadened to give Treasury discretion to buy “any other financial instrument.”

Elrod has a good post on opposition to the MOAB (Mother of all Bailouts) over at The Moderate Voice and Andrew Sullivan is "more than a little queasy."

Meanwhile, neither Obama nor McCain seems particularly enthused by any of this.

McCain seems to be trying to continue to cultivate a persona that is against the grain for him. He is an anti-regulator. He seems to have settled on the idea that he just doesn't trust any Republicans currently in office. He attacked SEC Chairman Chris Cox earlier in the week. Now he doesn't trust Hank Paulson:

"Never before in the history of our nation has so much power and money been concentrated in the hands of one person. This arrangement makes me deeply uncomfortable," McCain told an Irish-American group in Pennsylvania, a key battleground state.

I'm not disagreeing with him. I just think he and his campaign are walking a tightrope on this one. His anti-regulation, pro-free market natural approach to things may cause him to mis-step badly here if they don't be very, very careful. Given his gaffes of the last two weeks (we won't count the huge one on August 29), that might be a very dangerous course to take.

This part of that MSNBC article was particularly interesting:

In a statement to reporters, McCain urged the creation of a bipartisan oversight board to review the government bailout rather than entrusting Paulson with complete power to craft it. He said the board should be headed by a trusted financial steward like billionaire financier Warren Buffett, and said former Massachusetts Gov. Mitt Romney and New York City Mayor Michael Bloomberg should be involved as well. Both Romney and Bloomberg made enormous fortunes in business ventures before entering politics.

"I believe we need a high level of oversight and an oversight board to impose real criteria for those who need help and those who do not and that we have a careful steward of the taxpayer's dollars," McCain said.

Yup. That will go over real well with Main Street. Get Warren Buffett (I'll give you that the average American probably is OK with him), and add in two independently wealthy politicians who made huge amounts of money on Wall Street to help guard Main Street from getting ripped off here. Yeah, right, we'll get back to you on that one. In other news, people also think McCain has a bridge to sell them.

That also skips over the fact that, again, in a time of crisis, when leadership is needed, John McCain wants to form yet another time consuming commission.

Obama, according to the piece:

Obama ticked off seven conditions that he believed should be imposed on the Paulson proposal, joining some fellow congressional Democrats in raising warning flags and signaling the bailout mechanism might not make it out of the legislature by week's end as demanded by the Bush administration.

Obama said any bailout must include plans to recover the money, and protect working families and big financial institutions and be crafted to prevent such a crisis from happening again.

Again, Obama is offering at least some specific safeguard ideas. McCain is decrying putting too much power into Paulson's hands and recommending a commission of experts (albeit ones who made plenty of money on Wall Street.)

Finally, President George W. Bush, presiding over a financial crisis that rivals Herbert Hoover, had this to say:

"Obviously, there will be differences over some details, and we will have to work through them," Bush said, but "the whole world is watching to see if we can act quickly to shore up our markets and prevent damage to our capital markets, businesses, our housing sector, and retirement accounts.

"Failure to act would have broad consequences far beyond Wall Street. It would threaten small business owners and homeowners on Main Street."

Translation: "Let's see if I can pressure Congress into writing one last blank check before I bolt this place for Crawford!"

I think, given the current state of opinion in general, that it is extremely unlikely that the administration, Republican members of Congress and the bankers (notice how all of these groups want the same thing?) will get a "clean" bill free of oversight or regulatory powers. It is also highly unlikely that Treasury will get the get out of jail free card that they wanted inserted with language prohibiting 'judicial review.'

The example I started with remains valid. You have to cut the greed off at the knees. It is ingrained in anyone who works on Wall Street. If there is money there, they are trained to find a way to get it. It is what they do.


That is not what this bailout is about. And that is why some serious oversight is needed if we are to attempt this endeavour. If the oversight is included, give it a shot. If it is not, let them rot. We will probably suffer less long term damage by letting them hang by their own ropes than continuing to let them rob us blind.

The banks, by lobbying hard for a 'free and unfettered' authorization to the Treasury department are making us all look at them even more suspiciously. They are already getting a huge, absolutely massive, undeserved gift. Apparently, it isn't good enough unless it comes without strings. They may well find no gift if they continue this crap.

We can only hope that what does come out of all of this is a) enough to actually stem the tide of this crisis and b) not going to create a crisis of it's own. I share your uncertainty.



Comments welcome,

Pat McGovern

It's got electoral votes. It's what politicians crave.

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