The Bail out…is a cop out

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.

Here’s why:

  • 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.

This Boomer's Idea of the Perfect Bail-out Package

The sky is falling, the sky is falling!!!!

 

Or, more accurately:

 

The stock market’s crashing, the economy’s tanking!!!

 

The former, I think, is true only in that as we continue to pull lots of carbons out of the ground and spew them into the air, the sky falls ever closer to levels of damage beyond repair in this century.

 

The latter, I think, is more a matter of melodramatic, histrionic thinking seeded by failed but still very powerful bankers/corporations who don’t want to be held fully accountable for their bad behavior and exceptionally poor business practices like they will be if they have to handle this all by their weeny little selves.   They know that a “bail-out” will save their beautifully-clad asses and shield them from losing their personal shirts. 

 

They also know that the alternative will NOT cause the economy to collapse albeit the process won’t be pretty, for sure, but WILL force them to face and deal with the collossal pig-sty they created (my apologies to pigs…), with all the lost compensation that goes with it.  Over 200 very credible, highly regarded economists and scholars agree: this mess might get a little ugly, but will work itself out without one penny of government “bailing” money.

 

Finally, they are banking on (pun intended) the demonstrated m.o. of Americans these days, led by we Boomers (and unlike our parents); that we are not much for sacrifice on any level, are driven by the need for immediate gratification regardless of its long-term consequences, and therefore we will fall for anything that will keep us from the pain associated with atoning for our own glaring mistakes (making unabashedly bad if not somewhat greedy decisions to take on mortgages we couldn’t afford, with incomes that didn’t warrant the amount we borrowed, gambling on a big pay-off in a few short years as though our homes were a mini Vegas….).

 

Are they right?  Well, so far, they’ve completely underestimated the American public.  One point for us!

 

But the “bail-out” package is still worming it’s way through Congress (having at this writing won support in the Senate and now on its way to the House), and given Congress’ indebtedness to the bail-outees, will most likely pass.  One point for the bankers.

 

So, given that we Americans have a poor track record of holding our representatives closely accountable for their actions/lack thereof, an equally poor propensity for voting at all let alone voting anyone out of office for glaringly self-promoting performances, and our representatives’ certainty of this, what we want at this point really doesn’t matter. 

 

I guess you know that by now, given that an overwhelming majority of Americans are against the bail-out and it’s going to happen anyway.  Congress’ justification: we’re just too uninformed (read stupid) to know what’s really best for ourselves…and I have to admit they have a point as it relates to who we’ve chosen through our own apathy as our government leaders….  But they’re more than willing to accept our exceptional thinking prowess when we do vote and cast one for them, so I guess that’s where our brain power really lies…(?!)

 

Anyway, back to the bail-out.  Since it will happen, here’s a list of revisions to the provisions that I recommend Boomers insist upon when (and I hope it won’t be “if”) you call your Congressman today and tomorrow morning:

  • The amount not be a flat $700B with a phase-in component ( we know from experience that they will spend it all, and more…), but instead be authorized for only the first “phase in” amount of $250B: anything thereafter must be subject to Congressional vote, just like this was;
  • The “requirement that the Treasury Dept. make rules to prevent excess executive compensation” have a specific time-line by which that report will be due; the same goes for the President’s “established plan to recoup the cost from the financial industry if, after five years, there are any losses”;
  • “Cap deductibility of executive’s pay packagesfor firms that get $300M or more from the program…”?! I DON’T THINK SO….  Cap executive compensation period, at $500K for firms who get any bail-out money whatsoever
  • Oh, and the whole idea of raising the FDIC guarantee amount to $250,000 from the current $100K?  That is simply a ploy to get some folks to vote for this package.  It is not something that will ultimately benefit any more than 5% of Americans (personal or business), and it will simply increase what we’ll have to “bail out” when banks behave badly again…and I promise you, without serious regulation/oversight, they will – their historical track record proves it.  Eliminate this provision;
  • As for the ever-present and quite predictable throwing-in of all sorts of items that have nothing to do with the activity of “bailing” – inasmuch as I agree with most of them, particularly insurance coverage parity for mental illesses to physical ones, and tax breaks for clean, home-grown energy alternatives, they have no business in this bill and need to be handled separately, where they belong.

Well, that’s it, guidance from your Boomer Coach, whose job it is to provide you with all the relevant information you need to make a fully informed decision, do the research/compile the facts to that end, and be completely honest with you even when some of that feed-back isn’t a happy meal.

 

I’m Terri Benincasa, and I wrote this message.