gonegolfin
Member
I will discuss (in bullet form) a few of the key points of the proposal by the US Treasury (led by Treasury Secretary Paulson) and why I hate this proposal. By no means is this exhaustive (just ask my fantastic wife as she is subjected to my verbose rantings - and understands them as well), but I wanted to keep this a reasonable read. Here is a New York Times link to the stunningly brief text of the Treasury plan. http://www.nytimes.com/2008/09/21/business/21draftcnd.html?_r=1&ref=business&oref=slogin
* It looks to me that the $700 billion being touted in the bailout plan seems to be the $500 billion suggested on Friday plus the $200 billion announced in the Treasury's new "Supplemental Financing Program" ... Statement Regarding Supplementary Financing Program). Where do they get the $700 billion? They will auction off more treasury debt, which will suck in US Dollars that have been taken out of circulation as they are residing as reserves in foreign Central Bank vaults and other foreign investor accounts. Thus, this is just as inflationary as money printing because these "dungeon dollars" do not compete for goods and services at present (they are held as reserves). But once they are unleashed ... watch out. Any shortfall in treasury financing will be met simply with quantitative easing by the Federal Reserve (money printing). Also note that the $700 billion is simply a balance sheet item and not an expenditure limit. They can go back for more. Finally, this $700 billion is in addition to all of the other lending programs and bailouts already in service. The total number is approaching $2 trillion. And while we may get some of this back, I do not believe that $700 billion is going to be the total spent under the bailout plan. This number could easily be $1 trillion, if not more. I think we are probably talking about $1.5 -> $2 trillion total when all is said and done. Meanwhile, we will be creating an even bigger problem down the road. As opposed to the less expensive option of taking our medicine now and allowing the free market to purge the mis-allocation of capital and excesses (of course, Wall Street hates this idea as do the politicians that want homeowner bailouts). Of course, politicians always view this option as political suicide. But we need to let them know it is political suicide if they do not elect this option.
* The most reprehensible part of this entire proposal is the part of the plan that specifies that actions by the Treasury under its authority are unreviewable by the judicial branch (in fact, any court or government agency). This is dictatorial power. Here is the text from the proposal ... "Sec. 8. Review. 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." The proposal also states that the Treasury has the authority to purchase a range of assets, including mortgage loans, mortgage backed securities, and commercial mortgage related assets. But it also states that "other assets", in consultation with the Fed Chairman, can be purchased as deemed necessary to effectively stabilize financial markets. These two points (lack of any oversight and accountability plus the ability to monetize anything it sees fit) represent absolute power by the Treasury and Federal Reserve and is not representative of a free country with supposed free markets.
* I do want to emphasize the financial instruments that are eligible for purchase. Everything. From any institution considered to be a financial institution. While all the talk is about toxic mortgage loans, mortgage backed securities, and commercial real estate mortgages, Treasury expects that they will be purchasing student loans and auto loans, as well as CDO (Collateralized Debt Obligations) and other derivatives. I have also heard talk about bailout of the credit card companies. This significantly expands the funds necessary to execute such a proposed bailout.
* Originally, the pricing mechanism was described by Paulson as being a "market price" bid by the government. But this simply would not work because financial institutions do not want to sell at "market prices". They would go bankrupt. Thus, the bid must be above "market price". Now I am hearing that a reverse auction will be conducted. This is where the lowest price wins. The financial institutions are wary of this option as evidenced by the sell-off in the market today. However, the price they receive really depends on the supply of funds vs. the amount of assets that will be competing for these funds. Given enough money, some very high bids could be accepted (obviously bad for the taxpayer). If the supply of funds is dwarfed by the amount of assets for sale, then the banks could be writing off a lot of losses and the program will not meet the intent of the authors. But one question I have is how this really will be executed. You will need a reasonable complex classification system for the assets being put up for sale.
* Who will manage the bailout? Treasury proposes that consultants be brought in from the outside to manage this complex bailout. The same financial professionals that leveraged our financial institutions to "kingdom come" and now want to play doctor? No thanks. Do you think there could possibly be some conflict of interest here?
* This plan is really nothing like the Resolution Trust Corporation (RTC). Historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts (such as the RTC). Only after that did the government try to repackage and sell their assets. The federal government took over the S&Ls first, protecting their depositors, then transferred their bad assets to the RTC garbage can. As I mentioned in a previous missive, Sweden took over their troubled banks (nationalized them) in the 90's during their banking crisis, again protecting their depositors, before transferring their assets to their equivalent institutions and recapitalizing the system. Shareholders and bond holders were wiped out. This is not what is happening here. The Treasury and Fed are simply trying to pluck off the bad assets from the financial institutional balance sheets and once that is done, carry on with business as usual. Such that all of this can happen again, but on a grander scale (do not be fooled that regulation alone will solve this, not that any of this is in the proposal). Meanwhile, shareholders and bondholders are made whole and the taxpayer suffers.
* The litmus test for this entire crisis will be investors' (much of them foreign) willingness to participate in lending to the US for this bailout, as well as the continued required financing of the massive debt accumulated over the years (soon to be well over $11 trillion). Without this support, the bond market will head south and the dollar will be in serious trouble. The lack of sufficient support for our debt markets (which will be triggered by lack of confidence in the Dollar) will send interest rates higher until the bond bids are met. Where we land determines the fate of the bond market, our financial system, and our economy. This could then lead to a challenge of the US Dollar as the world's reserve currency as the world's investors and central banks may unload portions of their existing holdings. If the US Dollar loses world reserve currency status and enough foreigners dump their Dollar holdings, it is game over for the US Dollar and we will be forced to restart our financial system and form a new currency.
* One final point I would like to make as I have heard some financial analysts refer to this as similar to the problems the Japanese faced in their deflationary crisis of the 90's. How the bailout will be funded is nothing like the Japanese crisis of the 90's. Japan had a positive domestic savings rate (and a good one) from which the government could borrow. Japan was not reliant on foreigners to provide the funding the government needed to borrow. The US must get a significant amount of its funding from foreigners as the US in aggregate has a negative savings rate. What it cannot borrow domestically and overseas, it will print. This threatens the status of the US Dollar as the world's reserve currency. A benefit that I cannot understate. It means everything for the standard of living in this country.
Brian
* It looks to me that the $700 billion being touted in the bailout plan seems to be the $500 billion suggested on Friday plus the $200 billion announced in the Treasury's new "Supplemental Financing Program" ... Statement Regarding Supplementary Financing Program). Where do they get the $700 billion? They will auction off more treasury debt, which will suck in US Dollars that have been taken out of circulation as they are residing as reserves in foreign Central Bank vaults and other foreign investor accounts. Thus, this is just as inflationary as money printing because these "dungeon dollars" do not compete for goods and services at present (they are held as reserves). But once they are unleashed ... watch out. Any shortfall in treasury financing will be met simply with quantitative easing by the Federal Reserve (money printing). Also note that the $700 billion is simply a balance sheet item and not an expenditure limit. They can go back for more. Finally, this $700 billion is in addition to all of the other lending programs and bailouts already in service. The total number is approaching $2 trillion. And while we may get some of this back, I do not believe that $700 billion is going to be the total spent under the bailout plan. This number could easily be $1 trillion, if not more. I think we are probably talking about $1.5 -> $2 trillion total when all is said and done. Meanwhile, we will be creating an even bigger problem down the road. As opposed to the less expensive option of taking our medicine now and allowing the free market to purge the mis-allocation of capital and excesses (of course, Wall Street hates this idea as do the politicians that want homeowner bailouts). Of course, politicians always view this option as political suicide. But we need to let them know it is political suicide if they do not elect this option.
* The most reprehensible part of this entire proposal is the part of the plan that specifies that actions by the Treasury under its authority are unreviewable by the judicial branch (in fact, any court or government agency). This is dictatorial power. Here is the text from the proposal ... "Sec. 8. Review. 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." The proposal also states that the Treasury has the authority to purchase a range of assets, including mortgage loans, mortgage backed securities, and commercial mortgage related assets. But it also states that "other assets", in consultation with the Fed Chairman, can be purchased as deemed necessary to effectively stabilize financial markets. These two points (lack of any oversight and accountability plus the ability to monetize anything it sees fit) represent absolute power by the Treasury and Federal Reserve and is not representative of a free country with supposed free markets.
* I do want to emphasize the financial instruments that are eligible for purchase. Everything. From any institution considered to be a financial institution. While all the talk is about toxic mortgage loans, mortgage backed securities, and commercial real estate mortgages, Treasury expects that they will be purchasing student loans and auto loans, as well as CDO (Collateralized Debt Obligations) and other derivatives. I have also heard talk about bailout of the credit card companies. This significantly expands the funds necessary to execute such a proposed bailout.
* Originally, the pricing mechanism was described by Paulson as being a "market price" bid by the government. But this simply would not work because financial institutions do not want to sell at "market prices". They would go bankrupt. Thus, the bid must be above "market price". Now I am hearing that a reverse auction will be conducted. This is where the lowest price wins. The financial institutions are wary of this option as evidenced by the sell-off in the market today. However, the price they receive really depends on the supply of funds vs. the amount of assets that will be competing for these funds. Given enough money, some very high bids could be accepted (obviously bad for the taxpayer). If the supply of funds is dwarfed by the amount of assets for sale, then the banks could be writing off a lot of losses and the program will not meet the intent of the authors. But one question I have is how this really will be executed. You will need a reasonable complex classification system for the assets being put up for sale.
* Who will manage the bailout? Treasury proposes that consultants be brought in from the outside to manage this complex bailout. The same financial professionals that leveraged our financial institutions to "kingdom come" and now want to play doctor? No thanks. Do you think there could possibly be some conflict of interest here?
* This plan is really nothing like the Resolution Trust Corporation (RTC). Historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts (such as the RTC). Only after that did the government try to repackage and sell their assets. The federal government took over the S&Ls first, protecting their depositors, then transferred their bad assets to the RTC garbage can. As I mentioned in a previous missive, Sweden took over their troubled banks (nationalized them) in the 90's during their banking crisis, again protecting their depositors, before transferring their assets to their equivalent institutions and recapitalizing the system. Shareholders and bond holders were wiped out. This is not what is happening here. The Treasury and Fed are simply trying to pluck off the bad assets from the financial institutional balance sheets and once that is done, carry on with business as usual. Such that all of this can happen again, but on a grander scale (do not be fooled that regulation alone will solve this, not that any of this is in the proposal). Meanwhile, shareholders and bondholders are made whole and the taxpayer suffers.
* The litmus test for this entire crisis will be investors' (much of them foreign) willingness to participate in lending to the US for this bailout, as well as the continued required financing of the massive debt accumulated over the years (soon to be well over $11 trillion). Without this support, the bond market will head south and the dollar will be in serious trouble. The lack of sufficient support for our debt markets (which will be triggered by lack of confidence in the Dollar) will send interest rates higher until the bond bids are met. Where we land determines the fate of the bond market, our financial system, and our economy. This could then lead to a challenge of the US Dollar as the world's reserve currency as the world's investors and central banks may unload portions of their existing holdings. If the US Dollar loses world reserve currency status and enough foreigners dump their Dollar holdings, it is game over for the US Dollar and we will be forced to restart our financial system and form a new currency.
* One final point I would like to make as I have heard some financial analysts refer to this as similar to the problems the Japanese faced in their deflationary crisis of the 90's. How the bailout will be funded is nothing like the Japanese crisis of the 90's. Japan had a positive domestic savings rate (and a good one) from which the government could borrow. Japan was not reliant on foreigners to provide the funding the government needed to borrow. The US must get a significant amount of its funding from foreigners as the US in aggregate has a negative savings rate. What it cannot borrow domestically and overseas, it will print. This threatens the status of the US Dollar as the world's reserve currency. A benefit that I cannot understate. It means everything for the standard of living in this country.
Brian
