Five Things You Need to Know: Will the Bailout Succeed?
By Kevin Depew Sep 22, 2008 3:50 pm
Although unprecedented in magnitude, the solution proposed by the Treasury is hardly unique.
It's just past midday on the first Monday after the "Troubled Asset Relief Program" (TARP) proposal. The market is down 2.5% and things feel tense and weird, as if we are teetering close to the edge of something dangerous and unpredictable. That combination is usually all it takes to encourage the lurid thrill seekers while raising the hackles of the authorities. And indeed, that's precisely where we find ourselves, that strange place between aggressive fun and oppressive violence.
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?
What about the RTC in 1989?
And today?
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.
Meanwhile, I continue to get questions like the following:
Do you see similarities between what is happening now in the U.S. and what transpired in Japan, in the 90s?
There are some similarities, yes. But there are differences too. The main difference is if the TARP is approved, it could forestall the lingering malignancy of dead banks walking, transferring their bad assets onto the U.S. Government balance sheet. The main similarity is that while the situation may not last as long as the Japanese deflation, the purchase of bad assets by the Government does not make those assets suddenly good.
The problem is too much real estate supply at too high prices compounded by leverage. Another key difference between U.S. and Japan is that the Japanese consumer was a net saver. A critical difference between Japan consumers and U.S. consumers is the extraordinary relative divergence in the personal savings level and personal balance sheet comfort level.
Japan consumers entered a corporate balance sheet recession with very high savings rate, savings that never fell much below 3% even at the very heart of the quantitative easing policy that destroyed savings incentives. The U.S. consumer is entering worse business conditions with an almost 0% savings rate and a very thin cushion. Moreover, this debt unwind has been mainly isolated to Wall Street and mortgage debt and mortgage-related leveraged instruments for now, but it is quickly spreading to other areas of the economy.
There is only one thing necessary to understanding what is happening and it is this: no one at U.S. Banks, no one at the Federal Reserve and no one in politics can accept the reality that real estate assets in this country remain oversupplied, overpriced and overleveraged.
It is that simple.
TAF, TSLF, SuperSIV, TARP, none of that matters. No matter what acronym is created to disguise the fact that assets are overpriced, or what government intervention is created to prop up those asset prices, the market will inevitably overpower it. This time is not different. In fact, it is continuing to play out almost exactly as the Great Depression did. The bottom line is that despite the proposed bailout, whatever form it may take, risk in owning stocks has increased, not decreased.
No positions in stocks mentioned.
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2008-09-22 16:11:24
TARP TRAP and C...
Professor Pepe,
Interested parties looking to jape can also go to Calculated Risk, who last week - in a case of convergent evolution - also monikered this contraption as TARP.
Evolving by the minute, looks like Frank is asking for executive comp caps, as well as equity, and oversight.
Do you wonder if this program was a giant headfake to buy time for MS and GS to be converted to CB's with little fanfare? Direct access to the discount window that was set to expire in January, now.
BTW, any news on the Mr T gold signal, lately, considering where it's going? And what do you make of oil spiking to $130 today? TIA
Interested parties looking to jape can also go to Calculated Risk, who last week - in a case of convergent evolution - also monikered this contraption as TARP.
Evolving by the minute, looks like Frank is asking for executive comp caps, as well as equity, and oversight.
Do you wonder if this program was a giant headfake to buy time for MS and GS to be converted to CB's with little fanfare? Direct access to the discount window that was set to expire in January, now.
BTW, any news on the Mr T gold signal, lately, considering where it's going? And what do you make of oil spiking to $130 today? TIA
2008-09-22 16:22:25
Kevin the problem isn't the actual value of the assets it is the percieved value. The Assets are worth more than the market is willing to pay for them. You can't tell me that the mortgages sold by merril were only worth 20 percent of their face value. There isn't anywhere in the country where the homes have lost 80 percent of their value.
What the government intervention will do is move the debt to an owner that doesn't need to sell them right away.
This is a great step in getting the country back on track. Yes government intervention is scarry and not a prefernce for any capitalist but you have to be happy we have Paulson in charge. He may look like an escaped lunatic but he is an effective leader and a strong presence in a time when frankly we need it.
I am not for handing the man a blank check with no oversight but at the same time do we really want Pelosi, frank and Reed with their hands in the cookie jar? Oversight by congress means lobbyists will come into play. If the supreme court were to appoint accountants to monitor this I would be ok with that. People would scream and yell about wall street monitoring itself but who else can understand the books?
My Ideal panel would involve corporate accountants, Warren Buffet, Hillary Clinton, Mitt Romney, maybe Condi Rice after Bush's term is up, Give Warren the Chair all the accountants the work and Hillary and Romney the oversight function.
What the government intervention will do is move the debt to an owner that doesn't need to sell them right away.
This is a great step in getting the country back on track. Yes government intervention is scarry and not a prefernce for any capitalist but you have to be happy we have Paulson in charge. He may look like an escaped lunatic but he is an effective leader and a strong presence in a time when frankly we need it.
I am not for handing the man a blank check with no oversight but at the same time do we really want Pelosi, frank and Reed with their hands in the cookie jar? Oversight by congress means lobbyists will come into play. If the supreme court were to appoint accountants to monitor this I would be ok with that. People would scream and yell about wall street monitoring itself but who else can understand the books?
My Ideal panel would involve corporate accountants, Warren Buffet, Hillary Clinton, Mitt Romney, maybe Condi Rice after Bush's term is up, Give Warren the Chair all the accountants the work and Hillary and Romney the oversight function.
2008-09-22 16:32:22
Huh
Brad,
So you think lenders should have no recourse in court which is what Paulson is pushing? He want to absolve everyone in a blanket immunity and that violates basic contract law! This aint RUSSIA!
So you think lenders should have no recourse in court which is what Paulson is pushing? He want to absolve everyone in a blanket immunity and that violates basic contract law! This aint RUSSIA!
2008-09-22 16:37:09
Much has been written...
and will be written about the economic catastrophe of 2008 but you summed it up pretty well...
no one "can accept the reality that real estate assets in this country remain oversupplied, overpriced and overleveraged"
The only thing to add is that years of continued (and growing) current account deficits can't be sustained so something had to give.
It isn't enough for the ratio of debt to GDP to remain 'in range'. If the debt is never paid down no matter how high GDP grows then sooner or later GDP will fall and its game over.
If we only learn one thing from the sub prime debacle it should be that you can't rely on infinite growth for the salvation of a country and it's economy.
That 'tense, weird' feeling you have may be telling us that the time is nearing when we will have to pay the piper.
2008-09-22 16:46:15
Color of the Sky
Brad
Wow. You say you don't favor handing Paulson a blank check, yet that is precisely what this proposed bailout package delivers to him - a blank check for no less than three-quarters of a trillion dollars. This package makes the Treasury Secretary a dictator, quite literally: he gets to dictate how the money is spent with absolutely zero oversight, zero reporting requirements, and zero review. Within the confines of this package, he could write himself a check for $600 Billion and walk away the richest man in the world, and no one could say or do anything about it.
Given that Paulson presided over Goldman at the time when the complete abandonment of all risk controls was taking shape, and given that he has moved from saying the problems are "well contained" to saying that Fannie & Freddie are "well capitalized" and in no danger of collapse, how is it possible to view him as a talented, thoughtful, effective leader? At best he's a terrible prognosticator, though it seems far likelier that he is nothing more than a common liar and thief.
Seriously, Brad, what color is the sky in your world?
To defend these monsters by saying that we don't want Pelosi, Reid, and Frank running the world is no defense at all. In my opinion they are all the same, they are all corrupt beyond redemption, they are all treasonous monsters and I can conceive of no defense for any of them.
Wow. You say you don't favor handing Paulson a blank check, yet that is precisely what this proposed bailout package delivers to him - a blank check for no less than three-quarters of a trillion dollars. This package makes the Treasury Secretary a dictator, quite literally: he gets to dictate how the money is spent with absolutely zero oversight, zero reporting requirements, and zero review. Within the confines of this package, he could write himself a check for $600 Billion and walk away the richest man in the world, and no one could say or do anything about it.
Given that Paulson presided over Goldman at the time when the complete abandonment of all risk controls was taking shape, and given that he has moved from saying the problems are "well contained" to saying that Fannie & Freddie are "well capitalized" and in no danger of collapse, how is it possible to view him as a talented, thoughtful, effective leader? At best he's a terrible prognosticator, though it seems far likelier that he is nothing more than a common liar and thief.
Seriously, Brad, what color is the sky in your world?
To defend these monsters by saying that we don't want Pelosi, Reid, and Frank running the world is no defense at all. In my opinion they are all the same, they are all corrupt beyond redemption, they are all treasonous monsters and I can conceive of no defense for any of them.
2008-09-22 17:00:23
Not a "failsafe" move.
Perhaps the general public will be fooled by the tenuous actions of Congress and the Bush administration. They are cosmetic, at best. Regardless of who owns the "bad assets," they are still just that..."bad assets." Change of ownership will not change their value. Only difference is....the cost of ownership will be borne by every taxpayer in this great country. I can't cease wondering why citizens of the United States are forced to pay the costs of reviving the economy, which was dealt a "death blow" by the questionable management practices of those in our banking and mortgage establishments.
2008-09-22 17:15:10
Yes, indeed,
as Pepe states, we have seen this surehanded reaction before... just take it off the balance sheet. Yea, that's the ticket.
2008-09-22 17:40:40
From another thread I paraphrase my comments...
Because many of us have expected this possibility, even as some (like me) thought it unlikely, fear makes people do odd things.
I'm firmly opposed to the current action, but I see why the gov't did what it did. Fear is, usually, the emotion that drives people to extreme behaviors. It should never be that way, it just is.
What strikes me is this - when the risk of lending causes a lender to not lend, but not lending increases the risk of total failure to 100% - what is the correct course of action? Apparently, for banks, it's deciding that Mutual Assured Destruction is preferable.
We've witnessed a massive game of Prisoner's Dilemma and both prisoners ratted on the other, and now it's unlikely anybody wins.
The main question I have is this - you cannot legislate away moral hazard. Speculation is, by its very nature, moral hazard of a sort. Yet speculation brings stability to markets and pricing. That is, until that speculation is excessive and psychotic in nature. Then you are faced with potential price deflation on a massive scale.
I'm not yet convinced we're there yet. I know many people do believe we are and that the natural outcome of all these events can only be deflation. But that negates several scenarios. As someone else here pointed out, these securities have "no value" mainly because auction markets for these securities for them have dried up...not because they have "no value". In fact, their underlying assets remain intact and full of value, even if it is less than they were purchased for. How much less? 30%, 40%, 50%? Hard to say without a market. 80%? Definitely not...that would imply values equivalent to the early 1970s, and you can't convince me that my home is worth as much now as it was then.
Example of why some scenarios for improvement exist - a foreclosure in my condo has allowed us to purchase the unit for substantially reduced value. The owner has not cared for this unit for some time, and we will have to put some work into it. But once we purchase it, and rent it, it will be positive cash flow and our return will be substantial in a very short period.
In other words, crisis is opportunity. It's not just my condo. It's me, too. My wife and I are seeking opportunities to purchase because there will be many. We are also putting off the much needed purchase of a new car realizing we're likely to get a better deal(or at least no worse) in about 3-6 months...allowing us to further improve our financial position in the meantime.
This will be a negative situation only if people with the means allow it to be by not seeking opportunity where it exists.
Why would any of this surprise anyone? If we're not surprised, then we are prepared. If we are prepared, we can deal with it and thrive.
Then again, I was a Boy Scout.
I'm firmly opposed to the current action, but I see why the gov't did what it did. Fear is, usually, the emotion that drives people to extreme behaviors. It should never be that way, it just is.
What strikes me is this - when the risk of lending causes a lender to not lend, but not lending increases the risk of total failure to 100% - what is the correct course of action? Apparently, for banks, it's deciding that Mutual Assured Destruction is preferable.
We've witnessed a massive game of Prisoner's Dilemma and both prisoners ratted on the other, and now it's unlikely anybody wins.
The main question I have is this - you cannot legislate away moral hazard. Speculation is, by its very nature, moral hazard of a sort. Yet speculation brings stability to markets and pricing. That is, until that speculation is excessive and psychotic in nature. Then you are faced with potential price deflation on a massive scale.
I'm not yet convinced we're there yet. I know many people do believe we are and that the natural outcome of all these events can only be deflation. But that negates several scenarios. As someone else here pointed out, these securities have "no value" mainly because auction markets for these securities for them have dried up...not because they have "no value". In fact, their underlying assets remain intact and full of value, even if it is less than they were purchased for. How much less? 30%, 40%, 50%? Hard to say without a market. 80%? Definitely not...that would imply values equivalent to the early 1970s, and you can't convince me that my home is worth as much now as it was then.
Example of why some scenarios for improvement exist - a foreclosure in my condo has allowed us to purchase the unit for substantially reduced value. The owner has not cared for this unit for some time, and we will have to put some work into it. But once we purchase it, and rent it, it will be positive cash flow and our return will be substantial in a very short period.
In other words, crisis is opportunity. It's not just my condo. It's me, too. My wife and I are seeking opportunities to purchase because there will be many. We are also putting off the much needed purchase of a new car realizing we're likely to get a better deal(or at least no worse) in about 3-6 months...allowing us to further improve our financial position in the meantime.
This will be a negative situation only if people with the means allow it to be by not seeking opportunity where it exists.
Why would any of this surprise anyone? If we're not surprised, then we are prepared. If we are prepared, we can deal with it and thrive.
Then again, I was a Boy Scout.
2008-09-22 17:50:25
Much has been written...
Mr. Gondek, I perceive you feel a culprit in our current economic system is growth for it's own sake. It happens that capitalism is based on growth; it does not work, even in theory, in a steady-state environment. Also, consider this: in theory,equity shares are to be valued based on the discounted present value of future earnings; obviously this calculation is radically different depending on the anticipated rate of growth (and it is clear that, in practice, growth is valued in excess of the calculation).
If I recall correctly, you favor localizing economic transactions, perhaps even barter. If so.. to get that to work, doesn't the network of people in trade (or barter) HAVE to grow ? Did I miss something (not an expert in barter systems, sorry) ?
If I recall correctly, you favor localizing economic transactions, perhaps even barter. If so.. to get that to work, doesn't the network of people in trade (or barter) HAVE to grow ? Did I miss something (not an expert in barter systems, sorry) ?
2008-09-22 18:01:04
Yes, indeed,
And move it somewhere else! The shell game continues.
2008-09-22 18:05:22
The problem with the 700 billion bailout is that it is the last bullet. It has to work because there's nothing but absolute upheaval on the other side of it. But no one knows if the bailout will work or not, and it quite possibly won't. I attribute today's decline and probably further declines in the coming days, weeks, and months to this concept of "if it doesn't work, what then?". That's the abyss.
2008-09-22 18:36:30
Make over on the Penny
The US mint is going to give the penny a make over. Why are we still making a penny!??? It cost about 4 cent to make and another two cent to distibute. Lets do some math! Thats why the bail out plan won't work. We lose 5 cents for every penny we make. Thats before it get taxed.
JPM
JPM
2008-09-22 18:48:44
Necessity
Morgan Stanley and Goldman having escaped the reaper, is this package really necessary--who is left to save?
2008-09-22 19:14:39
Much has been written...
I think you have me confused with someone else.
I am not against growth. I just believe that continued growth of our GDP is taken for granted just as the continued growth (and increase in 'value') of housing was taken for granted in the sub prime fiasco. To use the phrase now in vogue...'its always the same until its different'.
In good times we don't raise taxes because we don't want to risk upsetting the band wagon. In bad times we can't raise taxes because people are struggling to make it with what they have. In the mean time the national debt keeps rising.
We have a society that feels that they deserve a certain standard of living even if they can't afford it. They are forcing the federal government to borrow over 2 billion dollars every month to deliver this inflated standard of living. We have financed wars, bailouts and 'rebates' to the point where now just paying the interest on the debt is a substantial drag on our economy.
This is all justified by those who say that the ratio of our debt to our GDP is the key statistic. However, what happens to this ratio if the growth of GDP not only slows but stops...or even declines?
It is not unthinkable and I submit there is reason to believe that with the transition of the baby boomers from peak earnings to becoming a burden on society this event may soon be at hand.
Given the state of our nation's finances this would not be a pretty picture. What will happen when people who have never known hunger start to go hungry?
This may sound alarmist but given the recent past things that were once unthinkable have become very real.
2008-09-22 20:49:48
Necessity
When I first heard the news about GS and MS I figured they were the main reasons for the quick action on the 700 billion.Now it seems they just want to hyper-inflate to maintain the Home price that was perception and quickly becoming reality.The end of September is the deadline for action on this bill.I guess timing is everything---Minyan,JT
2008-09-22 21:12:27
Much has been written...
You hit the nail on the head. And we haven't seen anything yet.
You know what's really weird? You can now predict the future by simply remembering your history class. Friends are calling me "Nostradamus" for betting the FNM/FRE bailout wouldn't work but all I did was study the year 1929.
Now, we have the mother of all bailouts on the table and stocks will continue to rise and (mostly) fall violently as the bailout is debated. But in the end it won't work, because we have dreadfully misallocated huge amounts of capital in things like investment banks and casinos, wasteful McMansions and useless TV. While doing nothing got the blame for Depression 1, doing anything can't solve the basic problem that too many owe too much and Depression 2 is sadly on the way. Wall Street is going to pay, but we will all pay until we allocate our resources properly.
"We will see riots in November 2008"---Nostradamus
You know what's really weird? You can now predict the future by simply remembering your history class. Friends are calling me "Nostradamus" for betting the FNM/FRE bailout wouldn't work but all I did was study the year 1929.
Now, we have the mother of all bailouts on the table and stocks will continue to rise and (mostly) fall violently as the bailout is debated. But in the end it won't work, because we have dreadfully misallocated huge amounts of capital in things like investment banks and casinos, wasteful McMansions and useless TV. While doing nothing got the blame for Depression 1, doing anything can't solve the basic problem that too many owe too much and Depression 2 is sadly on the way. Wall Street is going to pay, but we will all pay until we allocate our resources properly.
"We will see riots in November 2008"---Nostradamus
2008-09-22 22:48:42
historical comparisons
great stuff, very enlightening, with a dash of the push of contemporary history in the current trend - thank you much
ps - so good to hear someone say the simple truth, (house) prices are too high, and there's too many to sustain current prices
ps - so good to hear someone say the simple truth, (house) prices are too high, and there's too many to sustain current prices
2008-09-22 23:15:53
80% deflation?
"In fact, their underlying assets remain intact and full of value, even if it is less than they were purchased for. How much less? 30%, 40%, 50%? Hard to say without a market. 80%? Definitely not...that would imply values equivalent to the early 1970s, and you can't convince me that my home is worth as much now as it was then."
Well....if you consider how much gold it takes to buy the index...versus how much gold it took to buy the index in 1929, then those assets aren't really worth any more now than they were in 1970, or any other time. Inflation does that to things. Your house isn't a mansion just because the price is high when it's a doublewide in a swamp with a used BMW parked out front.
The real value of a house is in its living environment and utility (and yes, this includes location). This value has less to do with price and more to do with real money and real people getting real productive use of it. When everyone is a Prozac Marshmallow Head living in a drywall shanty in McMansion Fields Forever, all bets are off; especially when their banker is selling the mortgage to the Columbian money launderers.
Well....if you consider how much gold it takes to buy the index...versus how much gold it took to buy the index in 1929, then those assets aren't really worth any more now than they were in 1970, or any other time. Inflation does that to things. Your house isn't a mansion just because the price is high when it's a doublewide in a swamp with a used BMW parked out front.
The real value of a house is in its living environment and utility (and yes, this includes location). This value has less to do with price and more to do with real money and real people getting real productive use of it. When everyone is a Prozac Marshmallow Head living in a drywall shanty in McMansion Fields Forever, all bets are off; especially when their banker is selling the mortgage to the Columbian money launderers.
2008-09-22 23:58:35
We need more "tarps" over here!
It struck me as soon as I saw the acronym:
"Tanking Asset Relocation Program".
Unfortunately, I don't expect it to be successful in any meaningful sense. They're trying to solve a liquidity problem with more credit. Sadly, there's no honest way to move these failing assets to the positive side of the ledger.
And for those of you suggesting that home values couldn't possibly have dropped 80% in the last several months, you've clearly never been to an auction at a rural venue. I go regularly, and my wife has bought silly amounts of high value crystal for effectively pocket change. I spoke with the auctioneer about it a few weeks back and he shared some true wisdom with me: "People talk about the time value of money, but they forget about the money value of time. I could sell most of this stuff for 20 times or more what I'm getting now, all I need to do is put it in a store and wait. But, this is an auction, and nobody can wait".
"Tanking Asset Relocation Program".
Unfortunately, I don't expect it to be successful in any meaningful sense. They're trying to solve a liquidity problem with more credit. Sadly, there's no honest way to move these failing assets to the positive side of the ledger.
And for those of you suggesting that home values couldn't possibly have dropped 80% in the last several months, you've clearly never been to an auction at a rural venue. I go regularly, and my wife has bought silly amounts of high value crystal for effectively pocket change. I spoke with the auctioneer about it a few weeks back and he shared some true wisdom with me: "People talk about the time value of money, but they forget about the money value of time. I could sell most of this stuff for 20 times or more what I'm getting now, all I need to do is put it in a store and wait. But, this is an auction, and nobody can wait".
2008-09-23 00:37:13
80% deflation?
Dan---What came to mind was late 80's seemed prices in our area stagnated a long time till the push in late 90's early 2000's.Here a late 80's devalue would be in the -40% range
2008-09-23 00:53:39
Color of the Sky
As you bash Paulson I would like to point out that Goldman Sachs was still standing before the bailout and was in the best position of all the investment banks as this mess unfolded. Yes they were in danger but they did not create this mess.
I think a little oversight is more than called for in this case I even appointed my own imaginary committee if you bothered to read my whole post. I do not believe 700 billion with no oversight is a good idea. I am certain he put that provision in as a negotiating point. he will relinquish it allowing the dems and republicans to claim a small victory but overall he will have his plan in place when its all said and done. Don't forget this guy negotiates for a living and he is one of the best who ever lived at it. You don't run GS without winning a few boardroom battles the guys in congress are easy pickens compared to some of the deals he has done.
By the way on freddie and fannie he was making his statement based on numbers given to him by the respective managements. Within a week of his accountants going over the numbers he changed his tune and seized them. This was not dishonesty on his part.
Why am I being an apologist for Paulson? I don't even know him I never met him. I just want the truth to be known thats all.
Not everyone is a treasoness monster but in order to sort out the good and the bad you have to want to see something other than vengance.
This site is dedicated to knowledge and education and I am here to learn not be mocked and I am sure you are here for the same reasons. Lets keep the insults down and just address the post.
By the way I have thrown a few myself so no worries!
I think a little oversight is more than called for in this case I even appointed my own imaginary committee if you bothered to read my whole post. I do not believe 700 billion with no oversight is a good idea. I am certain he put that provision in as a negotiating point. he will relinquish it allowing the dems and republicans to claim a small victory but overall he will have his plan in place when its all said and done. Don't forget this guy negotiates for a living and he is one of the best who ever lived at it. You don't run GS without winning a few boardroom battles the guys in congress are easy pickens compared to some of the deals he has done.
By the way on freddie and fannie he was making his statement based on numbers given to him by the respective managements. Within a week of his accountants going over the numbers he changed his tune and seized them. This was not dishonesty on his part.
Why am I being an apologist for Paulson? I don't even know him I never met him. I just want the truth to be known thats all.
Not everyone is a treasoness monster but in order to sort out the good and the bad you have to want to see something other than vengance.
This site is dedicated to knowledge and education and I am here to learn not be mocked and I am sure you are here for the same reasons. Lets keep the insults down and just address the post.
By the way I have thrown a few myself so no worries!
2008-09-23 06:07:49
The Paulson Plan
What are Paulson, Dodd and Boehner afraid of? I'm quite sure that is is not that people will be leaping from office windows for there is no shame on Wall Street or in Washington. No, I suspect that they fear that bodies will be thrown through those windows.
2008-09-23 10:07:29
80% deflation?
I'm a contrarian. It's what I do best, and in a 'normal' situation, you would probably be reacting rationally and wisely.
But we aren't in 'normal' territory now: well, I take that back: we ARE in normal territory for the first time in 100 years. 'Normal' in this universe is randomness pockmarked with areas of stability. Stability is basic survival with perhaps a little surplus for a rainy day or year, but survival sometimes involves migration across half the planet.
The real 'bubble' we have to watch is called 'civilization', which we have known since the Greeks is anti-natural. No matter how hard we try to force our minds to be comfortable within the confines of our System of systems, it is still an unnatural condition and real randomness is always trying to break down our walls. What makes it even worse is that we are exacerbating the naturally occurring randomness the more we try to stabilize our bubble. The more we fight variations, the more resources we use, and the more resources we use, the less stable the natural world becomes, thereby increasing the chance that houses along the coastlines will not only drop by 80%, but will be under water or flattened.
"Plywood costs a dollar.
Evacuation costs a dollar.
Rebuilding costs a dollar.
Money down the drain, Max" said Ruby.
But we aren't in 'normal' territory now: well, I take that back: we ARE in normal territory for the first time in 100 years. 'Normal' in this universe is randomness pockmarked with areas of stability. Stability is basic survival with perhaps a little surplus for a rainy day or year, but survival sometimes involves migration across half the planet.
The real 'bubble' we have to watch is called 'civilization', which we have known since the Greeks is anti-natural. No matter how hard we try to force our minds to be comfortable within the confines of our System of systems, it is still an unnatural condition and real randomness is always trying to break down our walls. What makes it even worse is that we are exacerbating the naturally occurring randomness the more we try to stabilize our bubble. The more we fight variations, the more resources we use, and the more resources we use, the less stable the natural world becomes, thereby increasing the chance that houses along the coastlines will not only drop by 80%, but will be under water or flattened.
"Plywood costs a dollar.
Evacuation costs a dollar.
Rebuilding costs a dollar.
Money down the drain, Max" said Ruby.
2008-09-23 10:13:06
Color of the Sky
Good reply, Brad.
I agree that we all want to know what the truth is and how to moderate this type of situation in the future (if there is a future left after our tax chains are in place.)
As you pointed out, Paulson fought his way to the top. Perhaps the problem isn't the people, but the fighting and the height of the towers.
The government wants to prop them up, but nature wants them to come down.
I agree that we all want to know what the truth is and how to moderate this type of situation in the future (if there is a future left after our tax chains are in place.)
As you pointed out, Paulson fought his way to the top. Perhaps the problem isn't the people, but the fighting and the height of the towers.
The government wants to prop them up, but nature wants them to come down.
2008-09-23 10:18:45
The Paulson Plan
They are afraid of the psychological aspect of deflation. That is what the Fed fears as well. It is not a simple matter of making credit available. The Fed has many many tools with which to do this. The problem is getting people to use that credit. That problem is magnified because of the present burden of debt service both on Main Street and Wall Street. Their reluctance to discuss the "unmentionable" - which was simply this: the immediate shut down of an extraordinary number of businesses unable to access the short-term credit markets (commercial paper, instit. money market funds) to pay for day-to-day operations. Think about your own personal balance sheet for a moment. Most of us have our paychecks direct deposited into a bank account. We have an ATM card and a checkbook. Imagine for a moment that your bank freezes the ability to access those funds. That is what businesses were facing last week. That is essentially what Bernanke and Paulson told members of Congress and described to Dodd and Boehner. We were facing the shutdown of the economy virtually overnight. The issue now is no longer the details of the proposal. That sounds counterintuitive to people, but it is true. How and whether the assets are purchased and sold, the mechanics of it, are long-term issues that will settle over decades, not months. What matters NOW is whether the gambit will provide enough psychological force to unfreeze credit markets, especially as we approach a major surge in new credit issuance. The best plan, whatever it might be, will be fruitless if the deflationary psychology manifests as aggressive debt revulsion and credit avoidance. I think that because we are seeing the transition of a secular credit cycle from peak to trough, not a cyclical credit cycle, that debt revulsion and balance sheet repair is unstoppable. But that is a probabilistic belief, not an absolute. I may be wrong. Regardless, the point is that the "proposal" at this stage is a red herring, as hard as that may be for people to believe. It simply does not matter in the long-term what the mechanics of the bailout will be. The issue is whether anyone these days will buy credit, and at what price will they allow companies to roll over their debt.
2008-09-23 10:19:27
Why has no one mentioned the leverage???
With all this talk about how much the securities the government is buying with our 700 billion are worth no one even mentions the 30 to 1 (or higher) leverage that these investment banks operate under?
Talk about not seeing the forest for the trees!
What is this paper worth if it only represents one dollar of actual assets for every 30 dollars in supposed future value...and even the underlying 'real' assets are losing value.
Some people here act like these investment bankers just forgot their wallets at home and the government is going to step in and pick up the tab temporarily.
Don't worry these banksters will get he check next time.
2008-09-23 11:04:19
Ayn Rand vs Karl Marx
Ayn Rand Got us into this mess, but she ain't gonna get us out!
It is amazing to me that the great polar opposite philosphers that shaped our economic world for much of the 20th Century and this small portion of the 21st Century were both militant athiests.
It just goes to show that "dialectic materialism" and "greed as the gospel of joy" both have their limits. The paradigm of millions has been crushed.
It is amazing to me that the great polar opposite philosphers that shaped our economic world for much of the 20th Century and this small portion of the 21st Century were both militant athiests.
It just goes to show that "dialectic materialism" and "greed as the gospel of joy" both have their limits. The paradigm of millions has been crushed.
2008-09-23 11:19:54
The Paulson Plan
"The best plan, whatever it might be, will be fruitless if the deflationary psychology manifests as aggressive debt revulsion and credit avoidance"
I think you are right. Congress will hamstring the banks so where will the demand come from? I don't see folks ready to max out the cc's and get heloc'd to the eyeballs again.
I think you are right. Congress will hamstring the banks so where will the demand come from? I don't see folks ready to max out the cc's and get heloc'd to the eyeballs again.
2008-09-23 11:56:59
Color of the Sky
You're quite right and I apologize. I let my anger get the better of me, and I acted (and posted) stupidly.
2008-09-23 13:06:34
The last 700 billion dollar detail
Exactly. And if markets "don't like uncertainty", whatever that means, why is Intel,(Cisco, retail etc). still near twenty dollars a share with dirt cheap Puts?
Ironically, markets have provided a rare moment of certainty; all credit bubbles collapse, and this was the largest by far.
Ironically, markets have provided a rare moment of certainty; all credit bubbles collapse, and this was the largest by far.
2008-09-23 13:20:01
historical comparisons
It is interesting to hear politicians promote "affordable housing" while signing on to hopeless efforts to maintain inflated asset values.
2008-09-23 13:50:44
The Paulson Plan
The demand for credit - for it to do any good - has to come from a desire to produce goods and/or services. That implies a policy response - legislation - encouraging business. SO I suggest, ultimately, our representatives in DC have our economic future in their hands; or, at least, the speed of any eventual recovery from recession is up to them.
(I may have just talked myself into the gold-n-guns crowd.)
(I may have just talked myself into the gold-n-guns crowd.)
2008-09-23 13:51:41
Ayn Rand vs Karl Marx
Only athiests could espouse views so opposed to Christ's teachings. But, I would say Marx had it closer to the mark that people are basically greedy and that is often the prime motivator of their actions (even if they don't realize it). Rand just strikes me as the robber baron cheerleader.
2008-09-23 14:02:38
The necessity of growth
Sorry if this comment is off topic and possibly impolite. It is my first comment ever on any blog and I am not sure of the rules. I write it in response to earlier comments regarding the need for growth in our economic system.
We have an economic foundation of quick sand. That is the best analogy I can think of. Our economic system of capitalism is apparently based on and dependent on endless growth. Anyone with an understanding of math and exponents can see that a system dependent on growth in a finite world is doomed to failure in the long run (now approaching the short run).
The only way our economic system will not end in mass extinction of our species is if we are able to modify it to work as a stable sustainable system not dependent on growth but instead a gradual shrinkage back to a population that is sustainable and compatible with the thousands if not millions of other species that we are dependent on for our survival.
One other possible salvation would be that we are able to live in other worlds. If you believe in that possibility you are probably susceptible to other wild fantasy such as life after death, and Deities of one flavor or another. These crazy illogical beliefs are what have kept us for far too long chained to an economic system that can't possibly work in the long run.
We have an economic foundation of quick sand. That is the best analogy I can think of. Our economic system of capitalism is apparently based on and dependent on endless growth. Anyone with an understanding of math and exponents can see that a system dependent on growth in a finite world is doomed to failure in the long run (now approaching the short run).
The only way our economic system will not end in mass extinction of our species is if we are able to modify it to work as a stable sustainable system not dependent on growth but instead a gradual shrinkage back to a population that is sustainable and compatible with the thousands if not millions of other species that we are dependent on for our survival.
One other possible salvation would be that we are able to live in other worlds. If you believe in that possibility you are probably susceptible to other wild fantasy such as life after death, and Deities of one flavor or another. These crazy illogical beliefs are what have kept us for far too long chained to an economic system that can't possibly work in the long run.
2008-09-23 14:12:43
Paulson is the King
Section 8:
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.
-------------------
Hand over the $700 BILLIONS and shut up taxpayers.
-------------
QUOTE:
" STEPHANOPOULOS: The original legislation we saw said that you would be buying up the mortgage-related assets from financial institutions having headquarters in the United States. Yet last night, the fact sheet put out by the Treasury seemed to expand that. It said only that the financial institutions have to have significant operations in the U.S., and that you could waive that at your discretion.
So, will foreign financial institutions be eligible to have their assets bought?
PAULSON: Yes, and they should, because as you think about this, if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution.
That's a distinction without a difference to the American people. The key here is about protecting the system.[..]
But, remember, this is about protecting the American people and protecting the taxpayers. And the American people don't care who owns the financial institution. If a financial institution in this country has problems, it'll have the same impact…"
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.
-------------------
Hand over the $700 BILLIONS and shut up taxpayers.
-------------
QUOTE:
" STEPHANOPOULOS: The original legislation we saw said that you would be buying up the mortgage-related assets from financial institutions having headquarters in the United States. Yet last night, the fact sheet put out by the Treasury seemed to expand that. It said only that the financial institutions have to have significant operations in the U.S., and that you could waive that at your discretion.
So, will foreign financial institutions be eligible to have their assets bought?
PAULSON: Yes, and they should, because as you think about this, if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution.
That's a distinction without a difference to the American people. The key here is about protecting the system.[..]
But, remember, this is about protecting the American people and protecting the taxpayers. And the American people don't care who owns the financial institution. If a financial institution in this country has problems, it'll have the same impact…"
2008-09-23 14:44:21
Please don't miss the fine print
Bernanke is suggesting that the Treasury buy all these assets at 'Held for Investment' or Level 3 values and not 'Mark to Market' values.
Think about the implications for this. If MER and LEH recently sold mortgage backed securities for 20 cents on the dollar and suddenly the FED and Treasury are willing to pay 80-90 cents on the dollar, won't we have the mother of all MARK UPS?
People say that Paulson doesn't know what the heck he is doing. Of course he does. He is rescuing his buddies at the banks. Who do you think he hangs out with on the weekend? Me? Please, he hangs in the Hamptons with the hob-knobbers and the like.
Please read Bernanke's 2002 speech on deflation. He has said they he would much prefer to hyperinflate than to go into any kind of deflation. He said that in a fiat money system that if a Central Bank does its job, it can ALWAYS create demand by inflating (re: printing money) and forcing consumers to spend more on gas, energy, etc. Bernanke knows what he is doing. He is choosing hyperinflation over a period of deflation.
During the Depression, prices fell 10% year over year for three years. We haven't done that yet because Ben keeps devaluing the dollar to force us to spend more on things we need.
The only solution is the disband the Central Bank.
These people know exactly what they are doing. And they are doing it on purpose. They are making the middle class suffer on purpose. They are saving Wall Street instead of Main Street on purpose. They are printing money on purpose. They think they can get these things passed a Congress full of on-the-take buffoons. And they probably will.
Short the dollar, long the S&P. It's clear what the agenda is now.
Wish you all the best.
James
Think about the implications for this. If MER and LEH recently sold mortgage backed securities for 20 cents on the dollar and suddenly the FED and Treasury are willing to pay 80-90 cents on the dollar, won't we have the mother of all MARK UPS?
People say that Paulson doesn't know what the heck he is doing. Of course he does. He is rescuing his buddies at the banks. Who do you think he hangs out with on the weekend? Me? Please, he hangs in the Hamptons with the hob-knobbers and the like.
Please read Bernanke's 2002 speech on deflation. He has said they he would much prefer to hyperinflate than to go into any kind of deflation. He said that in a fiat money system that if a Central Bank does its job, it can ALWAYS create demand by inflating (re: printing money) and forcing consumers to spend more on gas, energy, etc. Bernanke knows what he is doing. He is choosing hyperinflation over a period of deflation.
During the Depression, prices fell 10% year over year for three years. We haven't done that yet because Ben keeps devaluing the dollar to force us to spend more on things we need.
The only solution is the disband the Central Bank.
These people know exactly what they are doing. And they are doing it on purpose. They are making the middle class suffer on purpose. They are saving Wall Street instead of Main Street on purpose. They are printing money on purpose. They think they can get these things passed a Congress full of on-the-take buffoons. And they probably will.
Short the dollar, long the S&P. It's clear what the agenda is now.
Wish you all the best.
James
2008-09-23 14:51:11
does such a thing as a "free lunch" exist?
My question is simple--is it possible for a government to avoid downturns by simply buying up any group of insolvent businesses or over-valued assets? If so, then no country would ever have to face a recession or a depression and we would all become richer and richer--since no one would ever have to fail at any economic endeavor. Somehow this does not seem possible--what am I missing here?
2008-09-23 14:57:23
I ran across this extremely well-informed dialogue on banks and the bailout:
http://www.rgemonitor.com/financemarkets-monitor/253723/what_is_to_be_done_interview_with_bert_ely
http://www.rgemonitor.com/financemarkets-monitor/253723/what_is_to_be_done_interview_with_bert_ely
2008-09-23 16:16:20
The necessity of growth
John how about this for future prospects. It could be said that all life is powered by energy produced from the sun and h20. The sunlight hits our little planet and plants turn it into energy that animals can eat. then the remains decay and become oil. Now I know that is greatly simplified but I need you to realize that this earth only captures a tiny fraction of the energy kicked off into the universe by our sun.
I think it is a safe assumption that h20 exists somewhere other than earth so we should be able to capture more energy from the sun and H20 from the universe and expand our species along with several others far into the outer reaches of space. I don't know if it will be on another planet or on a spaceship or a colony on the moon but we aren't done yet so quit worrying about running out of resources and lets concentrate on making our lives and our fellow mans lives a little better.
Yes I am a nut I admit it.
I think it is a safe assumption that h20 exists somewhere other than earth so we should be able to capture more energy from the sun and H20 from the universe and expand our species along with several others far into the outer reaches of space. I don't know if it will be on another planet or on a spaceship or a colony on the moon but we aren't done yet so quit worrying about running out of resources and lets concentrate on making our lives and our fellow mans lives a little better.
Yes I am a nut I admit it.
2008-09-23 17:31:15
The Paulson Plan
Very nice piece, Kevin.
What I think people (even non-partisan types) often forget is that political economy is dynamic rather than static. By that I mean that isn't actually any answer to questions like "How much should banks be regulated?" that is correct regardless of the economic environment at the time the question is asked.
So, the question "Who allowed this? Was it the Dems or the Repubs? the Fat Cats or the Naderites?" is actually a bit confused. When deregulation occurred, EVERYBODY was in favor of it (or should have been) not only because of lobbying or bribes, but because in good times it lowers utility to restrict profits and subsidize losses: if you do it capital will just flow to businesses or jurisdictions where it isn't being done. If property values are rising, this good shouldn't be restricted to the haves--everybody should have a shot at it. And everybody is for giving this shot, since it benefits the bankers, the insurers, the workers, the poor, the landless, everybody.
But, unfortunately, there's a land-value cycle. So now, it benefits everyone for regulation to be tightened. As you have eloquently pointed out, it isn't really feasible to oppose a bail-out when the result will be lines at banks that look like something out of "It's a Wonderful Life." It's not just moguls that need liquidity--it's small businesses, pension funds, money markets. So now, socialism is the order of the day...and not just because the lobbyists want it, everybody wants it (or would if the understood) because it increases overall utility to restrict profits and subsidize losses in bad times. Even Morgan Stanley now wants to see a bank examiner on Christmas Eve.
The confusion is in the belief that there's a "right" level of subsidization, gov't involvement, or regulation for any environment. I don't know myself exactly how this bailout should be constructed: what equity positions the gov't should take, what penalties imposed, or any of the (no doubt important) technicalities. But I understand that what costs there are are a result of policies that EVERYONE wanted at the time and must be paid for by everyone now.
Those who hate the uncertainty of a changing regulatory environment, and those who wonder if "it will work" should understand that land cycles can not be controlled by regulation. If you really want to do away with them, it would take structural change of a kind that most people can't stomach (something like a "single tax"). So there will be pain no matter what we do, but medicine must be taken anyhow, or it will be much worse.
Hang in there, everyone.
W
What I think people (even non-partisan types) often forget is that political economy is dynamic rather than static. By that I mean that isn't actually any answer to questions like "How much should banks be regulated?" that is correct regardless of the economic environment at the time the question is asked.
So, the question "Who allowed this? Was it the Dems or the Repubs? the Fat Cats or the Naderites?" is actually a bit confused. When deregulation occurred, EVERYBODY was in favor of it (or should have been) not only because of lobbying or bribes, but because in good times it lowers utility to restrict profits and subsidize losses: if you do it capital will just flow to businesses or jurisdictions where it isn't being done. If property values are rising, this good shouldn't be restricted to the haves--everybody should have a shot at it. And everybody is for giving this shot, since it benefits the bankers, the insurers, the workers, the poor, the landless, everybody.
But, unfortunately, there's a land-value cycle. So now, it benefits everyone for regulation to be tightened. As you have eloquently pointed out, it isn't really feasible to oppose a bail-out when the result will be lines at banks that look like something out of "It's a Wonderful Life." It's not just moguls that need liquidity--it's small businesses, pension funds, money markets. So now, socialism is the order of the day...and not just because the lobbyists want it, everybody wants it (or would if the understood) because it increases overall utility to restrict profits and subsidize losses in bad times. Even Morgan Stanley now wants to see a bank examiner on Christmas Eve.
The confusion is in the belief that there's a "right" level of subsidization, gov't involvement, or regulation for any environment. I don't know myself exactly how this bailout should be constructed: what equity positions the gov't should take, what penalties imposed, or any of the (no doubt important) technicalities. But I understand that what costs there are are a result of policies that EVERYONE wanted at the time and must be paid for by everyone now.
Those who hate the uncertainty of a changing regulatory environment, and those who wonder if "it will work" should understand that land cycles can not be controlled by regulation. If you really want to do away with them, it would take structural change of a kind that most people can't stomach (something like a "single tax"). So there will be pain no matter what we do, but medicine must be taken anyhow, or it will be much worse.
Hang in there, everyone.
W
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