The Dems And UberBailout

Posted by Zandar1 | Sep 20, 2008 | 9 |

The Dems should be saying “No way!” to the UberBailout.

There are four very good reasons behind that.

The real problem is the housing depression. This does nothing to solve the problem of housing prices that will fall another 10-25% nationally. More homeowners will go underwater. More banks will go insolvent as the good mortgage loans on their books go bad. Most likely we’re going to see a flood of Alt-A mortgages go bad — the ones that are only a step up from subprime — mostly issued in 2006 and 2007. Many of those had 2 or 3 year “introductory rate” offers. Those are going to reset big time in the next year. And they will blow up just as badly or worse than subprimes did.
Banks are still leveraged way out of proportion. They don’t have the cash on hand to handle another wave of defaults. And another wave of defaults is most certainly coming when Alt-A’s detonate. They are still leveraged to the hilt in huge amounts of funny paper…far, far more than $700 billion.
The problem is not liquidity then, it’s insolvency. These banks aren’t going to survive. This plan doesn’t even begin to address how much bad derivative debt these banks are carrying…they are basically insolvent and have been for months. All this plan will do is buy them enough time to dig a deeper hole for the next President to fill with our money.
This plan does nothing to stop moral hazard. Banks now have every reason to take crazy risks because they believe even the lousiest derivative traps they have set for themselves will get wiped off the books. We’re socializing the debt of these bad investments and letting the banks keep the profits privately. All this turn out to be is a delaying tactic. No additional regulatory oversight, no punishment, no safeguards, just Bush demands $700 billion. Why should we do that?

So it’s painfully clear that the UberBailout is destined for failure. The only people who can stop it are the Democrats…but given their track record on standing up to Bush, there’s zero hope.

Let’s face it. The Democrats have failed us at nearly every opportunity in the last two years. They’ve failed us on Iraq, Afghanistan, Pakistan, FISA, equal pay provisions, protections for civil liberties, oversight actions, curbing executive privilege, torture as standard operating procedure and now they are about to sign away our souls to the GOP and end our economy.

When UberBailout fails…and it WILL fail…we will be in a world of hurt. A third world, that is.

What we need is for the Dems to demand complete accountability and for them to come up with a real plan to deal with this issue…and yes, that means letting Wall Street deal with the consequences of its actions.

That will never happen. If anything, the Dems will want hundreds of billions more to bribe us with. Maybe some of it really will go to homeowners, but what of renters? What of the millions of us that don’t own a home?

The GOP clearly doesn’t understand how much danger the economy is in right now. Or maybe they do, maybe this is the plan all along. But they couldn’t have done it without the Dems.

No. The Dems will fail us again…maybe for the last time. And when they do finally fail us, when this plan fails to save the economy from collapse…

Who will be left to save us then?

There’s a glimmer of hope. A small one.

House of Representatives Speaker Nancy Pelosi said on Saturday that Democrats want to deal swiftly with the Bush administration’s $700 billion financial market rescue plan, but also want more oversight, taxpayer protections and regulatory reform.

“In working with the administration, we will strengthen the proposal by ensuring that the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms, and establishing fast-track authority for the Congress to act on responsible regulatory reform,” she said in a statement.

“We will also seek to protect lower- and middle-income Americans … from the fallout of the ongoing Wall Street crisis, by enacting an economic recovery package that creates jobs and returns growth to our economy,” the California lawmaker added just hours after the rescue proposal was unveiled.

But is it going to be enough?

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Zandar1

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dada on September 20, 2008 at 8:21 pm

if you have any trust in madame speaker after the fisa, and energy bill ~~cave ins~~ debacles…power to you.

…“is it going to be enough”

NO!

it’s bargaining time on the hill, and at the end of the day, the demoRAT’s powder will still be dry…not to mention beyond it’s ‘use by’ date.

this is the only thing that will change the equation:

you know that as well as l.

prospects of that happening between now and whenever?

zero
idredit on September 20, 2008 at 8:49 pm

Zandar, do you ever give credit on a link?

The Dems are over a barrel, locked into this Bush fiasco – he now confesses ” didn’t realise how severe problems were”

Anyhow, what America needs now are magic wands. Others are wishing us good luck with this $700 billion plan. We’re facing the great depression II.

The (derivatives) problem was last reported by BIS (Bank of International Settlements) as one quadrillion, one thousand one hundred forty four trillion – just an ant hill larger than the $700 billion requested to make whole the problem. With derivatives, notional value becomes full value when the counter-party goes into default (bankruptcy, restructuring, can’t may a payment).

Does any one think $700 billion will buy us out of this hole?

And the big overhang question – from the Independent UK, link above – since this bailout does not apply to –

“Hedge funds and non-US financial institutions would not be allowed to offload troubled assets”.

what happens to all these toxic bonds – CDO, CDS, SIVs FWMDs exported by the US to foreign banks and central banks? These originated with US banksters and are now illiquid assets? You bet there’ll be demands to ship these back to Wall Street. CDS felled AIG.

Ahead are the consequences because Ben and Hank will print away. Default on US debt by Hyper-inflating as did Germany.

the dollar on a pyre.

Gold positive
- Zandar1 on September 20, 2008 at 10:23 pm
  
  I do and if I’ve failed to do so, I apologize. I have a Reuters feed on my blog and check it often and I often use articles from there. If you beat me to it, then my hat’s off to you, I know you and dada have been on this for as long as I have, and that you understand how bad this really is. We seem to end up with the same conclusions more often then not.
  
  But it doesn’t take much to see that Bush has no real idea, Paulson has no idea, Bernanke has no idea. Double G says all this much better than I ever will anyway.
  
  Here is the current draft for the latest plan. It’s elegantly simple. The three key provisions: (1) The Treasury Secretary is authorized to buy up to $700 billion of any mortgage-related assets (so he can just transfer that amount to any corporations in exchange for their worthless or severely crippled “assets”) [Sec. 6]; (2) The ceiling on the national debt is raised to $11.3 trillion to accommodate this scheme [Sec. 10]; and (3) best of all: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency” [Sec. 8].
  
  Put another way, this authorizes Hank Paulson to transfer $700 billion of taxpayer money to private industry in his sole discretion, and nobody has the right or ability to review or challenge any decision he makes.
  
  And no, given the empirical evidence I’d have to agree there’s no real hope at this point. It’s coming down around us. The next President will have to spend pretty much all his time cleaning this mess up for what it’s worth.
  
  Obama won’t be able to get anything done. The GOP will be attacking every single thing he does. They will obstruct everything at every turn. McSame won’t make any effort to clean anything up. Hell the stress will probably kill him and Palin will just end up getting us nuked.
  
  It’s frustrating. We did this to ourselves. Really the only question in my mind is how much we’ll take before we decide the revolution is finally coming.
  - idredit on September 21, 2008 at 10:58 am
    you’re off the hook. thanks.
    
    Yes ,there’ll be a revolution when hyper-inflation hits joe and jill sixpack. Imho, Obama should let McCain-Palin have this mess. Whoever wins, its a one termer. Obama has been meeting with Volcker, and is keeping his detailed plan under wraps.
    
    As more details of the Bernanke-Paulson plan become known, some including Krugman, are ringing alarm bells.
    
    The two questions, Is this a wise deployment of tax dollars? What’s the cost? That’s unknown. One thing is clear they’re avoiding using the T word
    
    and the GOP can no longer label the Dems as socialists.
    
    Many, including the CEOs who signed off on these derivative products, have no understanding of derivatives. (My uncle is a CA with a household name firm – in 1999 they were alerting to the inherent dangers of derivatives in mindset that the economy would be straight up – canceling business cycles) In 2001, CDS (credit default swaps) derivatives were $900 billion –shot up to $45.1 trillion in 2007.
    
    Derivatives: stated at notional values become full face value in default; when the counter-party to the contract ends up in bankruptcy, financial accident, can’t make a payment – insolvent. It’s unlikely these assets can be bought at dutch auction, or any discounts as banksters’ losses will remain. The objective of this rescue plan is to mop up bank losses. So these Derivatives (think insurance policies) will be at full face value as in your insurance policy on your house covers replacement value. These bonds were insured against default.
    
    All the safeguards and regulations will not stem the bleed.
    
    Over at TPM – Put on the Brakes– includes this link to WSJ:
    
    Lobbyists Scramble to Sway Deal
    
    WASHINGTON — Titans of the financial industry are battling to influence the government’s financial rescue plan, a package that will create new winners and losers in the sector.
    
    Democrats in Congress want a rescue package that benefits homeowners at risk for foreclosure, not just Wall Street. Securities houses don’t want executive salary limits for banks that participate in the rescue…[.]
    
    :::: ::::
    
    and also at TPM is Dean Baker’s Progressive Conditions for a Bailout
    
    Principles to Guide the Bailout
    
    Financial institutions should be forced to endure the bulk of the losses with taxpayer funds only used where absolutely necessary to sustain the orderly operation of the financial system.
    The bailout must be designed to minimize the opportunity for gaming.
    The bailout should be designed to minimize moral hazard.
    In the case of delinquent mortgages that come into the government’s possession, there should be an effort to work out an arrangement that allows the homeowner to remain in her house as owner. If this proves impossible, then former homeowners should be allowed to remain in their homes as renters paying the market rent. This should be done even if it leads to losses to the government.
    There should be serious efforts to severely restrict executive compensation at any companies that directly benefit from the bailout.
    
    Principles for Restructuring the Financial System
    
    [.]
    
    Makes a lot of sense. But Benny, Hank and W will get away with this as is. They want a deal passed by tomorrow, (Monday) without a study or read.
    
    Everybody wants in…as Paulson clarifies – says (US based) foreign banks can use U.S. rescue plan
    
    Take a number. Pay the lobbyist and you get to stand in line at the begging bowl.
glenj on September 21, 2008 at 3:08 am

NO DEALS!

No BAILOUTS for Wall St. Capitalism says failed banks go broke. Let them fail.

It’s called bankrupt. That’s why we have bankruptcy court. We’re going to need to fund the FDIC, not a bunch of failed banks.

Call your Senator and Congressperson and demand NO DEALS.

The Bush bailout is a sham which will only make the situation WORSE. Is that really a surprise – haven’t we seen this bums rush before?

This is not really a Democrat or Republican issue, this is preventing the worst President ever from taking down the whole system! Make the call – stop the insanity!

Here’s a letter to Obama from a banker at Agonist.org:

Dear Senator Obama-

Chances are most if not all of the major commercial and investment banks are insolvent. Not one of them is opting out of the do-not-short list, and they don’t seem to have the confidence in their survival to opt out of the L3 asset swap program Secretary Paulson is proposing.

It is also very likely that acutely dangerous systemic risk already exists, not merely from direct lines of credit among the banks, but especially from credit default swaps, which if activated by more than one large bank default would probably bring down many others. Remember, though, that this systemic risk is highly concentrated in the top 25 or so banks in the world, and does not jeopardize the 6,000 other community banks in the U.S.

Third, it is also highly probable that as this recession worsens, and as housing values continue to sink, forcing more foreclosures, the large banks will be even closer to collapse.

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

What Sec. Paulson wants you to believe is that catastrophe is approaching, but it can be averted if only Congress acts urgently to give him the extraordinary authority he is requesting. The implication is if you don’t give him $700 billion in borrowing authority within a week, markets will collapse and it will be all your fault.

We’ve seen this drill before, with the Patriot Act and with the Iraq War authorization. The scare tactics, the urgency, the implied threat of blame for any failure – this is what the Bush administration does. Some of you in the Senate were able to stand up to this pressure, and that type of strength is desperately needed now.

If insolvency is here now for the big banks, the last thing you want to do is throw $700 billion of money that is not yours at bailing out the banks who created this disaster. You’ll need every bit of that money to protect the taxpayers and their deposits in these banks when these financial companies are thrown into the bankruptcy courts. You’ll need that money to make sure consumer deposits are protected with insurance, and you’ll need it to keep the healthy parts of these banks that deal with consumers and businesses functioning until they come out of bankruptcy.

And forget about comparing Paulson’s plan to the RTC. These L3 assets aren’t homes, condos, or commercial real estate that can be easily sold at the right price. They are bits of paper giving the bond holder the right to some small portion of thousands of mortgages, a right that is shared with all the other investors, who are required to agree on what is done with foreclosed properties in the pool. This is one of the reasons no one wants to buy this stuff, and no one will for many years until it is crystal clear what the final losses will be.

Once you give Paulson the authority he seeks, he will buy these securities at 65 cents/dollar, then quietly auction them off at a nickel each. It will be “unfortunate but necessary” to revitalize the banking industry, even though you will discover the banks won’t be lending after this is all over to any but the finest credits. You will have rewarded the banks for their calamitous decisions, stuffed the taxpayers with huge losses, squandered your remaining ability to shore up the FDIC, not prevented the big banks from collapsing anyway, done nothing to help the community banks that will constitute the new banking system in this country when these problems are solved, and in the end made the situation much worse.

If you want to do something practical, require the SEC to go into these banks, open up their L3 holdings to public scrutiny, auction off a sampling of these securities, and apply those prices to the L3 portfolios of all the banks. In this way we will know which banks are insolvent. You won’t need to go through this charade of having the Treasury take ownership of these assets, because the core of the problem is not that these assets are clogging up bank balances sheets, as Paulson says (which is tantamount to saying, by the way, that no one will buy them). The core of the problem is that there is no transparency about these portfolios and their real worth. Congress doesn’t need $700 billion of our money to create that transparency, and if it shows as I suspect that many of these banks are insolvent, that’s why we have bankruptcy courts. You can certainly protect the banks from bank runs while they are in bankruptcy.

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

Please, please, do not fall for some useless compromise or bipartisan agreement that gives the administration what it wants in the end. Kill this proposal here and now, protect us from this bailout, and deal with the real problem – the insolvency of the major banks, not the paper that is supposedly blocking their lending capabilities.

Sincerely
Zandar1 on September 22, 2008 at 6:52 am

Things are moving fast now. Overnight last night Goldman Sachs and Morgan Stanley got out of the investment bank game and were converted into commercial bank holding companies.

Federal regulators converted Wall Street’s remaining stand-alone investment banks – Goldman Sachs and Morgan Stanley – into bank holding companies Sunday night.

The move allows Goldman and Morgan to scoop up retail banks and to streamline their borrowing from the Federal Reserve. The shift also is aimed at removing them as targets of nervous investors and customers, who brought down their former rivals Bear Stearns, Lehman Brothers and Merrill Lynch this year.

But it also puts Goldman and Morgan under the Fed’s supervision, increasing the agency’s regulatory oversight and possibly forcing them to raise additional capital. As banks, Lehman and Goldman will be forced to take less risk, which will mean fewer profits.

And it brings to a close the era of the Wall Street investment bank, a storied institution that traded stocks and bonds, advised mergers and showered lavish bonuses on its executives.

“The separation of investment banking and commercial banking has come to an end,” said Bert Ely, an independent banking consultant.

Good news, right? More oversight, tighter capitalization rules, better regulation is a good thing.

Wrong.

This just means these two now get access to the Trough: the Fed Lender of Last Resort Window and FDIC protection on the depositor assets they’ll be gaining, putting even more strain on the system.

They’re now in the same boat as WaMu and Wachovia now (the one with the all the leaks), instead of the already capsized boat of Bear Stearns, Merrill Lynch, and Lehman Brothers.

It’s just delaying the inevitable.
- Zandar1 on September 22, 2008 at 3:23 pm
  
  It’s utter pandemonium out there.
  
  Nymex oil futures are trading up twenty dollars at $125 a barrel on the last day of the October contracts.
  
  Gold is up $40 an ounce to over $900.
  
  The dollar is in pure freefall crossing the $1.48 mark and heading to $1.50.
  
  There is no rational controlling force in the markets now. Anarchy reigns.
  - idredit on September 23, 2008 at 11:11 am
    
    FT brings us tiny nuggets that demonstrate the brush fire is spreading: Everybody wants in –
    
    Plea to extend shorting ban
    
    More companies in the UK and the US have been appealing to regulators for protection from short selling after the practice was banned or restricted for banks and other financial stocks in many countries last week.
    
    The Securities and Exchange Commission on Monday gave exchanges control of the list of US stocks protected from short sellers, which was extended to an extra 96 companies. New restricted stocks include carmaker General Motors, industrial group General Electric and GLG Partners, the hedge fund.
    
    Calls for protection have come particularly from property groups, where trade bodies fear their shares could come under assault from short sellers. Short sellers aim to profit from falling prices by borrowing shares and selling them in the hope of buying them back for less.
    
    General Electric said it had requested that the SEC should place it on the list, while GM said it had not asked to be included. Under the new SEC rules, companies can opt out of the list, although the New York Stock Exchange said that none had so far.
    
    [.]
    
    The US National Association of Real Estate Investment Trusts is talking to the SEC about getting its members on the protected list, following a similar request from Reita, the UK real estate investment trust body. F&C Asset Management, a UK fund manager, has asked the Financial Services Authority if it can be included.
    
    Property analysts worry that hedge funds seeking an alternative to shorting banks could move on to the heavily indebted real estate sector.
    
    Soon, very soon they’ll have to close the markets.
Zandar1 on September 23, 2008 at 12:39 pm

Arguably the funniest thing I’ve heard from anyone about this issue, Helicopter Ben says that unless Congress get that bailout going, we’ll be in a recession.

Federal Reserve Chairman Ben S. Bernanke said the U.S. economy will shrink if markets don’t begin functioning normally, joining Treasury Secretary Henry Paulson in urging skeptical lawmakers to quickly pass a $700 billion rescue for financial institutions.

“I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover,” Bernanke told the Senate Banking Committee today. “My interest is solely for the strength and recovery of the U.S. economy.”

I’ve got news for you Ben. There’s nothing you can do.

The Dems And UberBailout

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