Why, you say, do I say that the wall street bail out, in essence, won’t work? Here’s an excerpt from an article on this topic found in Money Morning, that explains it well. To read the full article, go to: http://www.moneymorning.com/ppc/senate_agg.html?gclid=CKPn18iok5YCFQhdswodiCp_FA and subscribe.
Heads I Win, Tails You Lose: Why the Senate Bailout Bill Will Fail Taxpayers
In plain English, here’s what’s wrong with the proposed plan and what alternatives should be immediately vetted and constituted into a new plan.
The Treasury plan was originally predicated on buying $700 billion of collateralized residential mortgage-backed securities that banks could not unload. The idea was that the banks would get the money, which they could then turn around and lend to keep the credit markets open and credit flowing throughout the economy. In the meantime, the Treasury Department would sit on the securities until it is able to sell them, hopefully at a profit. The idea, from a theoretical standpoint,isn’t stupid. It is, however, impossible to implement to any degree that will result in its intended effect.
- There are more than $1 trillion worth of subprime collateralized mortgage-backed securities out there – and that’s just one type of problematic derivative security. The bottom line: $700 billion isn’t enough. Period.
- The purchase plan is not limited to just residential mortgage-backed securities. Surprise! What else will Treasury buy?
- Who’s going to fight off the lobbying groups out to influence the managers that the Treasury Department hires to direct money to their masters? Did we mention that $700 billion wasn’t enough?
- The government plan is even more under-funded than people realize, for it doesn’t authorize the full $700 billion: Indeed, it starts with only $350 billion, leaving an even greater shortfall. Did we mention that $700 billion wasn’t enough?
- Treasury is going to hire banking-industry managers to manage the process. Those managers are going to serve themselves – just as they served themselves to get us into the crisis.
- There is no defined mechanism to determine what price the Treasury Department will pay for what it buys. For argument’s sake, even if Treasury were to only buy the problem securities its leadership speaks of in public – residential mortgage-backed securities – there are problems if it prices them too low: If that happens, some holders won’t sell them, taking the chance that if they hold them long enough they will be worth more than Treasury is willing to pay. How will those financial institutions regain liquidity if they won’t sell the securities needed to make this happen?
- Since Treasury can’t buy all the problem securities, if it prices what it’s going to buy too low, all remaining holders will have to mark down their holdings and take more write-downs and losses. How will that create confidence and facilitate “liquidity”?
- However, if the Treasury Department prices the securities too high, several problems quickly emerge: Hedge funds will rush to sell their current holdings, and may very well speculate by buying up more securities to sell them at a higher price (profit) to Treasury, meaning that the Treasury Department plan won’t necessarily be helping banks directly. What’s more, if those securities are priced too high, and the market for them continues to fall, taxpayers will eat the losses – a reality that likely will lead to an end to further program funding.
While the idea that taxpayers should get warrants and ownership in the entities that we buy securities from is theoretically a good idea, there are some issues. Let’s take a look at some of the biggest potential pitfalls:
- Foreign banks aren’t going to be thrilled about that; yes, they are included in the list of whom the Treasury will buy from.
- Are taxpayers going to be limited partners in hedge funds? What if those hedge funds implode?
- The U.S. Treasury Department could end up in control of our banks. Considering how well they run the government’s fiscal house, is that what we want?
- Who is going to decide when to sell any of government’s ownership interests, should they turn out to be profitable? Will we own these businesses forever?
- Is government going to control private enterprise? Is this a ruse? Are we heading into an era under the stewardship of a socialist government?
- There is no direct support for homeowners in the plan and no support mechanism for falling home prices. And yet, these twin evils are the root causes of what has happened.