with people of good intent your bottom lines would be addressed and addressed correctly with courage.

I am afraid my friend we live in a far from perfect world, however.

The Democrats are looking to tie permanent bans on exploring for oil in Alaska and Colorado to this mess. They also want a new economic stimulus package which is more welfare then stimulus as I believe you would agree with me on that.

The bailout lost me when it became known that Lehman Brothers took 2 billion dollars and set it aside so that bonuses could be paid. No matter what it seems that senior and executive management always first of all makes sure they get paid for incompetence.

Jack

You are one of the only sources for information worth paying attention to on this subject.

I agree with what Jack (jdripper) said…

To hell with Wall Street. At this point, I’m more willing to ride the storm out than bail them out.

Ride the storm.

Listening to Paulson discuss the plan, it seems to me that no one knows the value of these asset and that valuing them is more art than science (of course, that’s always the case, but is more likely to be the case during this time of market uncertainty).

Since we won’t really know the FMV of these assets when we buy them, we will be taking on much of the risk with respect to the valuation. Shouldn’t we extract a pound of flesh from these companies in the form of equity just for taking on that risk (a la AIG)?

I recognize that such a plan would end up with the government owning stock in a large variety of companies in the financial sector, but isn’t that a better outcome than bailing out the current shareholders? Isn’t this more of a “market” solution than what’s currently being discussed? Particularly since if the companies survive, we could gradually sell the stock back onto the market and recover some of the costs of owning these assets.

I’d heard an interview yesterday where it was suggested that the bailout could be lessened(or even avoided) if certain actions are taken. The one idea I remember is the thought that capital would “flood” the market if an executive order was issued to suspend the capital gains tax. For the life of me, I can’t remember the other ideas. Anyway, would something like that really make that much of a difference?

I’d heard an interview yesterday where it was suggested that the bailout could be lessened(or even avoided) if certain actions are taken. The one idea I remember is the thought that capital would “flood” the market if an executive order was issued to suspend the capital gains tax for 3 or 6 months. For the life of me, I can’t remember the other ideas. Anyway, would something like that really make that much of a difference?

from a financial or economic collapse not subsidizing Wall Street’s foul up faction. If the bailout happens we had better not overpay for anything. Paulson ought to err on the side of undervaluation rather than overvaluation. If Paulson makes this a bailout of his buddies instead of protecting the public interest then he ought to be prosecuted for failing in his fiduciary duties (??). (Is that even prosecutable?). The prudent companies will weather the storm just fine, the fools should be taken to the cleaners without endangering the rest of the country. I simply have no sympathy what so ever for the fools, they ought to get everything they so richly deserve.

from a financial or economic collapse not subsidizing Wall Street’s foul up faction. If the bailout happens we had better not overpay for anything. Paulson ought to err on the side of undervaluation rather than overvaluation. If Paulson makes this a bailout of his buddies instead of protecting the public interest then he ought to be prosecuted for failing in his fiduciary duties (??). (Is that even prosecutable?). The prudent companies will weather the storm just fine, the fools should be taken to the cleaners without endangering the rest of the country. I simply have no sympathy what so ever for the fools, they ought to get everything they so richly deserve.

Thanks for the article. Trying to wrap my head around what to think is frustrating at times.

All I know for sure is that the world must be about to end when Kos sides with conservative Republicans !

Government helped create this mess and now Government is saying it can fix this mess…with tax dollars. This is a little too close to “taxing our way to prosperity.”

Perhaps Paulson is a standup guy, but in this political climate with the way the Democrat and Republicans will try and load the bailout bill with goodies, it will end up in disaster.

I also don’t think Paulson will be able to avoid political pressure to over value some of these securities.

From what I see, both finance and politics have come together to create a toxic environment that will defeat even the best of intentions when it comes to a bailout.

Cut the cap gains to zero and leave it there. Get government out of the way.

I am no economic genius, but my gut sais the “v” is better than the “L” any day of the week….we are Americans, we will not only survive but I believe history will show this as our greatest defining moment…..

I wrote in my own blog that the debate seemed to be dictated by those seeking political gain and idealogues. The problem is that means that finding a better solution, if there is one, isn’t happening. I’m not a supporter of “bailouts” in general but I did read an intersting article at http://www.usnews.com/blogs/capital-commerce/2008/9/22/bailout-prevents-great-depression-20.html where the author argues that not doing a deal could hit the economy by an amount upwards of $30Trillion. I don’t know if his guess is right but it does tell me that those politicizing and ideologues ought to think really hard before they acheive a Pyrrhic victory.

There appears no way to calm the financial waters without tranferring the burden to the (already overburdened to the tune of $450000/person) US taxpayer. Along with the $700B (likely $2T when all said and done), we are expected to react rationally when:

-$2.5B is set aside for corporate bonuses.

-Foreign owned banks will be bailed out by US taxpayer. If this is a world problem - where is the rest of the world?

• Sec Paulson (and whomever replaces him) will have essentially dictatorial powers over the process, with no oversight or legal constraints. This is the guy from GS who is *responsible *for huge amounts of this toxic waste.

• The banks/firms will off load every crap investment they ever made onto the US taxpayer after pocketing all of the fees and upfront profits.

• They will not be forced to return all of the associated profits as a ‘downpayment’ to fixing the problem.

• No talk of jail time or other punishment. Whatever happened to ‘ya pays ya money, and ya takes ya chances?’

• Dems are trying to load every POS social/handout/anti-energy program they can into this No Banker Left Behind Bill.

No one in charge is bothering to expalin anything to the average citizen Wouldn’t thsi be a good time for our Communicator–in Chief to address the nation?. We get perfunctory quotes from ‘alarmed’ and ‘concerned’ officials - the very same idiots that got us to where we are today.
Will this move ‘fix’ the system? From what I’ve read, it will not. It will only propagate the existing situation. We will then need to rely on Congress (Dodd,Frank Pelosi,Reid?!) to pass new laws. Lord help us!
These ‘brilliant’ financial minds loaned money to people who could not re-pay (yes, many by force from Congress, but they made thier fees up front), ran up the price of housing, and are now surprised that we have the current situation?!

Obviously, letting the system crash will be incredibly painful and dispruptive in ways perhaps no one has even contemplated. But I am so pissed off about this, I want some vengeance (sorry, but I’m not doing rational right now).
Francis, you make persuasive arguments for the bailout, but are too optimistic about its results. I don’t trust Washington politicians or the Wall St. crowd to do anything but what is in thier best interests.

The most frightening aspect of this whole situation is that the Feds will be in a position to control the heart of the economy by holding the keys to Banking/Investment/Credit industry. Imagine what Obama and his evil minions in Congress will do with that in 2009(Mccain the populist won’t be a lot better).

Perhaps it’s time for a stomach pump after the binge we just went on. If there is no Plan B, it’s over any way you slice it.

If I’m understanding the situation correctly, these companies are having cash flow problems and no one is willing to advance them money for day to day operations based on the real(?) value of their illiquid assets.
Logically, if someone were to buy those assets (the tax payers for instance), in a free market they would buy them at a deep discount not at a premium. Why not a two pronged approach? Purchase illiquid assets at a deep discount and if more liquidity is needed for day to day operations, either arrange a loan or guarantee loans from the private sector.
The tax payers accept the risk of the portfolio for the potential upside down the road, while either getting interest on a loan or not bleeding the treasury dry but rather, guarantying loans from the private sector.
The best we can hope for and it’s a stretch, is that Washington won’t over reach and Christmas Tree the Bill with a bail out of the human race or sit in political squalor and do nothing.

If only we have the guts to try it.

Unfortunately, I don’t think we have anything like the guts to try it, the closest proximity to said guts being Congressional constipation: if Democrats try to force too much candy down their gullets, the Republicans may go bolemic, causing nothing to be done through gastro-paralysis.

In other words, our only hope is if the system works, the default result being inaction.

My suspicion is that the Republicans will be afraid of the stock market, November 4 being so close, and will let the Democrats have their way. They don’t realize that their only chance is to stand on principle for a change,

http://www.ftportfolios.com/Commentary/EconomicResearch/2008/9/22/heresaplantoavoidanew_rtc

“All of this can be avoided if a system were put intoplace that allowed private companies to hold these distressed assets. Rather than a centralized holding
place, why not use a decentralized one? Why not allowfinancial firms with structured (Tier 3) assets issued
between December 2003 and August 2007 to suspendmark-to market accounting for those assets, and receive
government insurance as a backstop? This would be a temporary solution, not requiring any ultimate change
in Sarbanes Oxley or mark-to-market accounting rules, and the government could even make money by selling
insurance with less risk to the taxpayer than buying them outright.

In essence a firm could sequester, or firewall off these specific assets from the rest of its balance sheet,
and either finance this itself, or bring in outside financing. The firm would promise to hold the securities to maturity, or until government insurance
was no longer needed when it liquidated the assets. All of these deals could be settled in the private sector, in
multiple locations with the government looking over the shoulder of each deal.
If the rules had been relaxed a little bit for these specific assets, Merrill Lynch could have created its
own private equity investment fund inside its corporate structure instead of selling at a huge loss to Lone Star,
which created its own holding vehicle.”

Why not even discuss less dramatic solutions that accomplish the same thing as the proposed bailout. THe problem with mortgage-backed securities is that that many are temporarily valued far below their “true worth” because there is no current market for them. Instead of creating a centralized government-run location for them (government being the one entity without the same balance sheet requirements), why not make it so that the various companies can park those assets in their own private-sector parking lot?

Remove these assets from the company’s debt/cash ratio and liquidity will be restored.

Bottom Line: Rejecting the proposed bailout is not the same thing as deciding to do nothing. Until someone addresses these temporary mark-to-market rule adjustments as a possible solution, I will withhold my support for an unprecedented $700B expenditure that has to be made now.

This is not a conservative trying to play a blame gamge.

This is a conservative being conservative.

Pertaining to those who only want to criticize, I have a quote from Ronald Reagan “It only takes a stupid jackass to
kick down an old barn but it takes a pretty good carpenter to build a new one”
A plan is better than no plan at all!
Independent and veteran for McCain/Palin.

We would be better off to simply drop the idea of a bail-out rather than accede to the demands of the democrats.

Government created this problem and now it wants to fix it. I think we taxpayers are understandably skeptical. Oh, don’t get me wrong. The government could fix the problem, but it won’t. Instead it will create a corrupt government run finance system - just what we don’t need. I’d rather see the market crash all the way to the bottom than have the democrats’ wishes come true.

A stitch in time saves nine, or something to that effect:

Debt became a problem for many Romans because interest rates had risen during the Civil War. Caesar lessened the amount debtors owed to creditors by assessing the value of their possessions at the same price which they had paid before the war. He further reduced their debt by allowing them to deduct the interest they had already paid. Caesar also rebuilt the rostra, the court house, and the curia on the old forum.

Source:
http://www.dl.ket.org/latin1/historia/people/caesar.htm

It appears that Paulson and Barney Frank can work out some kind of compromise. It won’t be ideal, of course, but a deal will be made.

But to me, the problem lies in the Senate. And in my opinion, the obstacle to getting a deal done is likely to come from the Republicans. It only takes one Senator to create real problems for passing legislation like this, and there are at least a handful of Republican Senators who are already on record as being shall we say uncomfortable with Paulson’s plan.

bh, you say

If there’s no deal, there’s no upside for Republicans. (Other than being able to cry in their beer that they fought the good fight.) For Democrats, there is significant upside because they can blame the coming financial-market crash on the Republicans. That charge will stick because ordinary people have no clue what’s really going on.

Isn’t that always the case when there’s some big spending bill on the table? If we believe such a bill is harmful and we fight it, we automatically get painted as the bad guys because we’re portrayed as not “doing something.” Rush discusses this all the time - “doing something” means passing legislation in Democrat-ese. So if we disagree with what the Left is trying to “do”, we wind up looking evil…unless we come up with some other “something” to propose instead of theirs. So far, I haven’t seen the GOP propose any better action except “let ‘em go out of business!!!!”

So the question to you and the rest of our august community is: “is there some better alternative we can propose other than sitting on our hands?” It sounds to me like you’re in favor of the Congressional bill (perhaps without all the extra crap they’re sticking in there), as long as the price is right. And I certainly defer to your superior knowledge on this subject, as all I can do is draw an analogy with my checkbook, and the financial markets are far more complex than that.

Unfortunately in times like these the innocent will get hurt also, but there must be a price to pay for the greed that exists in America. The mindset of “I” must have it now must change, and the only remendy that can cure it is the pain of loss.

Do the right thing with the right methods and our nation will be the better for it!

is best for low/middle economic class Americans (majority) to me. Those that survive day to day will find it harder to find work. Middle class long term investors will have retirement devaluations, but in time they will return. While I am not in favor of “intentionally” allowing any depression kind of era, but common sense says debts have to be paid and I for one would rather do it now than later. If gov intervention can ease the pain bring it on in moderation, but as a guide not a cure.

Thank you- I always appreciate your explanations of market forces that for the most part are a mystery to me.

Rip the band-aid off Francis, I’m ready!

Didn’t we just bail out the mortgage industry to the tune of $300,000,000,000? Yet, now, the government is asking for another $700,000,000,000? Can there really be that many bad loans out there?

Sorry, but it’s starting to sound like a money pipeline that keeps sucking money into a black hole.

Normally I try to stay away from economic subjects except to try to learn but these questions just keep bubbling in the back of my mind.

I’m sure that these people have already categorized the bad portfolios from good portfolios of Fannie and Freddie and the rest of the doomed WS companies.

So, what did they find out?

If the main cause is the really the bad loans for socialized housing (e.g., pressures by Black Congressional Caucus), then bailing out is not really the solution.

It will only worsen the situation because the solution is not really directly addressing the root cause of the problem.

When McCain looses in November, don’t forget how the Wall Street financial crisis suck his ship and the GOP’s ship.

Look for huge gains by the Dem’s in the house and senate.

CNN:
By a 2-to-1 ratio, Americans blame Republicans over Democrats for the financial crisis that has swept across the country the past few weeks, a new national poll suggests.

n a CNN/Opinion Research Corp. survey out Monday afternoon, 47 percent of registered voters questioned said Republicans are more responsible for the problems currently facing financial institutions and the stock market; only 24 percent said Democrats are more responsible.

Twenty percent blame both parties equally and 8 percent say neither party is to blame.

Forty-nine percent of those questioned said Obama, D-Illinois, would display good judgment in an economic crisis, six points higher than McCain, R-Arizona.

And Obama has a 10-point lead over McCain when it comes to who respondents think would better handle the economy overall.

These numbers seem to be affecting the battle for the presidency. Fifty-one percent of registered voters now say they will back Obama, five points ahead of McCain, at 46 percent.

n/p

I say that because it places a tarp over the problem and concentrates too much power in the Treasury Department.

Personally, in my opinion a blanket statement saying that fairly or undervalued MBS purchase would force “many” of these firms out of business is a bit overstated. If you look at the latest Fair Value accounting rules there would first need to be some clarity behind how such assets are valued (level 1, 2 or 3) in this plan. Prior to our latest market woes most instruments such as CDO’s were being valued as a category 1 due to the active market aspect. This was changed to a level 3 for most since valuation required “unobservable” inputs (e.g. no active market –arguable, in my mind, perhaps a better phase would be no market at which you care to really value the instrument, but I digress).

Point being, why not agree on a market value and permit generous write offs or some other means to remove this from their balance sheet? Why should taxpayers be the one wearing a “kick me” sign in this whole mess and buying what is otherwise an illiquid asset? And why in Heavens name would Paulson ever give a green light to lard this process up with more giveaways of our money to “Main Street” and other irresponsible players.

Effectively, what is being done (based on the latest plan iteration) is to prop up values and then push taxpayer to pay for overvalued instruments. That’s not a plan, it’s a manipulative market fiat and makes Treasury, in the parlance of Adam Smith, a distortive effectual demander.

I certainly understand, perhaps better then most, the implications of not effectuating this bail out. However, one can not underestimate the destructive, and in my estimation, criminal role this Democratic Congress has played in creating our financial crisis. That is centrally important since it leads to a logical conclusion that, considering Senator Dodd, Congressman Frank and Senator Obama - the biggest recipients of Fannie/Freddie lobbying money whom have twice killed efforts by President Bush and cosponsored by McCain, could have averted this crisis and are still in control, should tender their resignations from Congress and our Presidential race for sake of confidence. Then perhaps I would support the bailout, imbued with confidence current efforts would not have a fox in the henhouse and perhaps future situations may have a taxpayer advocate, since certainly none can currently be found.

By the way, nobody has done a better job of explaining why MBS/CDO’s are essentially a liability of “Main Street”.

that there is an objective value to the mortgaged assets, no matter the “market” price. The land may be hard to value at other then market comparables, but the improvements are tangible things with a readily discernable replacement cost, established depreciation schedules etc.

To move this to the real people level, a real person would never sell their house for less than it would cost to build it except in the direst circumstance. If avoiding forcing fire sale valuation, then a scheme that put a floor value in place based on what it would cost to build the mortgaged asset would seem rational. There are, of course, variables that would have to be sorted out, e.g., there was dramatic inflation in building materials costs at the height of the boom and at other times due to shortages brought on by hurricanes, etc., that would have to be factored somehow.

Fundamentally, these assets may be worthless right now because there is nobody willing and able to buy them, but the underlying asset has a value. If the value can be brought back to that of the land and the actual improvements, it becomes a useful property to someone even if only as a rental or real second home. The days of buying to flip are hopefully gone forever and I knew something was very wrong when the assessment for my lot went over what I paid for the house and lot. Part of me wants all those smart boys and girls to be broke and unemployed as I know I would be if I’d done something so stupid - and this stupid, corrupt system is still paying these criminally stupid, if not outright criminal, people bonuses.

Let the companies crash, the bad mortgage lenders and (especially) the bad mortgage takers, and all the people who participated in this mess reap what they have sown. I swear I could have almost kissed Pelosi when I learned she was offering to block the bailout.

There are consequences to your actions. It’s time to remind America and Wall Street of this. It’ll hurt, but you know what? The US Army is still hiring.

Just a couple of months ago there was a bailout for $300 billion which was supposed to “fix” things because of mortgages being issued that people couldn’t pay. Now, I know what it takes to buy a house and there had to be some creative accounting (read: fraud) for that to happen. You don’t just loan out money to people without knowing their verified incomes and other financial responsibilities.

It’s not just the regulations of F & F that Democrats imposed, it’s the whole practice that was put in place to allow this to happen.

We were assured then that it would be fixed, yet this is suddenly thrust upon us as a crisis… and it must be resolved NOW to stop further crises.

As Blackhedd said, they will issue warrants and what those warrants will do is cover up the fraud. When that happens, these same people will go back to business as usual at the taxpayers’ expense because there were no adverse consequences involved. Nobody is even talking about investigating anything, just a “give us your money and we’ll fix it” attitude.

And we’re assured again that this will fix it. We’re warned that if we don’t act quickly it’s going to get worse.

Average people like me feel like we’re being set up and that this plan has been in action for a long time.

Now, I know a lot of good people are going to get caught up in the nightmare with the bad people but if this sort of thing is allowed it sets the pattern for everything in the future.

I have to come down on the side of the V, too. Capitalism means bad businesses fail, not get bailed out and allowed to continue fraudalent practices.

First impression of the breaking news on the 19 of Sep was that the USD was no longer needed as a safe haven. Hence the Euro shot up 10 cents through the 22 of Sep 08, and commodities quit selling off. Mondays action depreciated the USD further cause of the anticipated deficit.
This is where an imcompetent Congress, more interested in their pet projects, loads up the bill with superfluous doo-doo and kills the bailout by loading it up even more. Then the USD becomes a safe haven bid and commodities tumble again, and financials get crushed recalling their leveraged bets and trades. Main street would win with much lower gas prices.
If Congress maintains their focus: The USD becomes weak and may get crushed with its brand spanking new trillion USD deficit and oil will retest and surpass its $147 highs.
Just initial brainstorming and conjecture based on recent observations of the currency markets and news.

First impression of the breaking news on the 19 of Sep was that the USD was no longer needed as a safe haven. Hence the Euro shot up 10 cents through the 22 of Sep 08, and commodities quit selling off. Mondays action depreciated the USD further cause of the anticipated deficit.
This is where an imcompetent Congress, more interested in their pet projects, loads up the bill with superfluous doo-doo and kills the bailout by loading it up even more. Then the USD becomes a safe haven bid and commodities tumble again, and financials get crushed recalling their leveraged bets and trades. Main street would win with much lower gas prices.
If Congress maintains their focus: The USD becomes weak and may get crushed with its brand spanking new trillion USD deficit and oil will retest and surpass its $147 highs.
Just initial brainstorming and conjecture based on recent observations of the currency markets and news.

Have you seen the polling on the bailout? It is starting to look like opposition to the bailout might be more popular than drilling.

The problem with this is that there are a number of feedback loops waiting to kick in if the economy goes down.

Higher unemployment means more foreclosures which will increase the losses on mortgage securities.

More insecurity means people will be unwilling to take on a large mortgage. Many more will decide to stay as renters if they feel their jobs are threatened. The result will be a much bigger decline in housing prices that we would get if the economy stays healthy.

Broken financial markets might mean that mortgages become very expensive or even unavailiable. In that kind of economy houses would sell for whatever people could afford to pay in cash.

The really scary possibility is the possibility that things get out of control in ways that nobody could foresee. The Fed and Treasury Department might not be able to fix things before a big chunk of the financial system collapses like a line of dominoes. Then we could get something like a Great Depression. That will be the end of America as a global power because our military will be slashed to save money. People might have to retire at 75 rather than 65. People may turn to Socialist or Facist solutions like they did in the 1930s.