Posted on 09/26/2008 6:33:12 AM PDT by koraz
In our national debate about Treasury Secretary Hank Paulson's proposed financial rescue package, we are having the wrong conversation.
This is not about how to bail out Wall Street. This is about saving the U.S. financial system for the benefit of American businesses, consumers and the economy at large. I believe that Mr. Paulson's plan will accomplish this goal. Congress should include provisions it feels are necessary to ensure oversight and accountability. And it should then pass the legislation as soon as possible.
There is no question in my mind that our financial system and our economy are at risk. Right now, the flow of funds that makes our economy run is threatened by a lack of confidence in the value of financial assets, particularly mortgage assets. Financial institutions are extremely hesitant to purchase assets or lend money to one another to fund the system.
(Excerpt) Read more at online.wsj.com ...
I like the House GOP insurance idea, and their idea on removing capital barriers. Also, allocate maybe $100 billion seed money to creating a market-making clearing house operation. Encourage private capital to be invested. Require that all major financial institutions selling to this fund receive shares in the fund in return, rather than cash. This ensures their interest in the fund making money, rather than taking advantage of the fund. The shares will be exempt from all US taxes. Create a put-deal in the shares, so that the shares can be put back to the Treasury at 90% of purchase price after 3 years.
This clearing house would create a public auction system for these assets, where investors, not taxpayers, are the ultimate buyers and sellers. This would allow people to engage in price discovery. The clearing house could unpackage and repackage CMO deals if necessary, to spread the risk from these awful deals unto a wider capital base. Once the process of price discovery begins again, the market will start to see profit opportunities, and will get back in the game and take things over themselves.
The band has been playing since 2006, when the iceberg first loomed in the distance.
The band members are Bush. Bernanke and Paulson, and the tune they've been playing all that time is the "Economy is Fundamentally Sound Cakewalk".
All of a sudden the band has dropped their instruments and dashed over to start rigging out the lifeboats, so it's no surprise the passengers are confused.
“This is about creating a market”
Sorry, but government is not designed to “create markets”. If the market dies, so be it. That is capitalism. The fact we refuse to practice true capitalism has us now considering socialism, as though that is a better solution.
What Paulson should do, and given his background what I expect him to do, is bring in-house from Wall Street the best traders from the most successful mortgage desks on the street.
For each security, the Paulson team discovers the trading history and what and where the current positions are in the market.
Paulson gets a team of the most experienced mortgage pool evaluators from the rating agencies and the bond insurers to do a valuation analysis on each of these mortgage pools as a check on the auctions and at what price Treasury should participate.
The key to doing this right is getting the right people from the street in the tent pissing out, and not vice versa, and Paulson can do this without getting screwed by Wall Street.
If you really are a portfolio manager, then you know that most of these people really do consider themselves patriotic Americans and would willingly serve the Treasury department at a government salary for the privilege of doing their part for the country, even though I know most people on FR would not believe it.
“I suppose if an asteroid hit the other side of the planet, we’d have a few hours to chuckle about those poor bastards in China.”
That was a completely stupid remark. This isn’t about shadenfreud.
They declared bankruptcy. Their stock is about $0.29. Their creditors will take a loss on their debt.
yet, they are willing to pay out an additional $2.5 billion to the employees in bonuses.
Barclays, the firm which bought a part of Lehman, is willing to do that.
That doesn’t sounds like they are broke to me.
It sounds like you are confused.
Even while begging for taxpayer handouts they continue to rob their companies blind.
Lehman is not begging for a handout, for all intents and purposes, Lehman is dead.
Jim, I generally agree. There clearly needs to be a reduction in the credit economy. I myself have never taken on too much debt because I heard the horror stories about the Great Depression from my grandparents and mother. Unfortunately most Americans (individuals, investors and businesses) never got this memo.
The question is, do we need a hard crash or can we have a managed workout? I prefer the latter. It is part of the reason why I support McCain. I think he will work to clean up the system in an orderly, sensible way.
I am amazed at the class envy that exists. In some ways I say let the crash happen. Like you, I have protected myself and I know I will survive. Those ranting the most about stopping this plan have no idea how difficult life will be. I imagine that they have never gone hungry a day in their life. They have never had to worry about having a roof over their head. IMO, it would be good for the country to experience that again. We could get back to what makes America great!
The CEOs of big banks have a vested interest in cheap short term credit. It's cheap short term credit that caused 99% of this problem, first by driving all rates lower and second by stimulating the creation of the securities to turn cheap short term credit into cheap long term loans. Of course this CEO and the others would like to keep rolling and refinancing.
But we can't because we have overdone it. Our credit market debt (not including any financial securities) is 51 trillion against a GDP of 14T. There is no way our economy can pay even just the interest on that amount. The Fed has been delaying the inevitable with cheap short term credit which keeps the interest payments more manageable and allows rolling the debt into new securities. Almost 10T of the 51T is federal and is being rolled at relatively low rates.
The growing risks of inflation and default will force long term rates higher. Bernanke has said all along he will respond by printing money to buy longer term treasuries to force rates lower, a losing proposition. The merry-go-round would have continued except the bailout is necessary now because of the systemic risk of all of the financial debt (probably 100T in securities and 500T in derivatives). The amount is open-ended, but the meltdown is still inevitable.
Here's what needs to happen: the 51T needs to be reduced to 40T or less. That means big banks need to write off amounts like 500B or 1T rather than the 50B amounts that they have written off so far. The govt can help do that with debt purchases with the specific goal and requirement of reducing credit market debt. Anything else is pointless and so far the Treasury proposals do not address the debt at all, just the financial securities.
Remember that the financial securities is an open-ended amount, at least 100T with at least 500T in derivatives. Buying and reselling those is pointless. Buying and burning them is almost as pointless plus inflationary.
<< I like the House GOP insurance idea >>
Although we don’t have any details on the plan, I have a number of questions and concerns as to this idea in general here:
http://www.freerepublic.com/focus/news/2090673/posts?page=31#31
The idea of pulling cash out of the financial system to pay the expensive premiums that a government guarantee of these securities would involve is exactly counterproductive to the goal of reversing the credit contraction and getting funds flowing back available for businesses in the real economy.
And to solve that problem you would be back into some kind of deferred premium scheme or loans where we are exposed to the credit of these banks or else take the MBS securities themselves as payment for the premiums, and that gets us back into the government holding MBSs which is of course the Paulson plan.
“I suppose if an asteroid hit the other side of the planet, we’d have a few hours to chuckle about those poor bastards in China.”
That was a completely stupid remark. This isn’t about shadenfreud.
***********
I think you missed his point. It isn’t schadenfreude. The asteriod is going to destroy us too it is only a matter of time.
You would structure it so the premium is taken from the coupon rate paid by the securities. No one cares about the interest payments right now. When a bond is selling at 20-30 cents on the dollar, its sensitivity to changes in the coupon rate is going to be low. People just hope they can get some of their principal back. If their principal is guaranteed, I think they’d be feeling a lot better.
-- Treasury Secretary Henry Paulson, March 16, 2008
"Our policy in this administration -- laws shouldn't bail out lenders, laws shouldn't help speculators."
-- President Bush, May 19, 2008
"Our economy has continued growing, consumers are spending, business are investing, exports continue increasing and American productivity remains strong. We can have confidence in the long-term foundation of our economy...I think the system basically is sound. I truly do."
-- President Bush, July 15, 2008
These guys have been wrong all along the way. They've been trumpeting the fundamental soundness of the US economy as recently as a couple of months ago. Now it's "we have to pass this measure.........or else!!". Rather a different tune, isn't it?
I have no more confidence that they're right now than I had confidence that they were right back then.
And yet we do.
The growing risks of inflation and default will force long term rates higher. Bernanke has said all along he will respond by printing money to buy longer term treasuries to force rates lower, a losing proposition.
When did he ever say that? Link?
That's an interesting idea. I think the net effect would be to shift more risk to taxpayers than the results that would be obtained through the auction pricing mechanism, but that may be appropriate given the magnitude of capital impairment at the banks.
The problem I have with the auction is that the Wall Streeters will collude to manipulate the process. Collusion is very difficult to prosecute, and even moreso when no one really knows what the stuff is for sure.
I told a guy from a big bank trading desk this morning that I don’t fall for the idea that Wall Street is going to knowingly sell me something at 20 that is really worth 80. He said that no one cares anymore what stuff is actually worth, but that it is about survival. So I offered to buy some options from him for 1/7th their true value. For some reason he didn’t want to sell to me. I wonder why?
OK. How about Paulson gets his troupe of merry men to work on government salaries to evaluate the value of the securities first, then certify them insured by the Treasury - at a small cost to the security holders? Since apparently, the problem is Wall Street and the banks don’t trust themselves to do the job they already made money doing.
Do you understand the concept of contagion? Do you understand that financial markets and our economy are based largely on confidence? Can’t you see that Paulson and Bush’s comment could have been correct and that the situation has changed since then?
IMO, I think when history is written on this, they will say that a lack of confidence attributed to the meltdown (along with a lack of morals and too much leverage). I am not surprised about the lack of confidence since MSM has been trash talking the economy for the last eight years.
Notwithstanding your anecdote, there really does appear to be an illiquidity premium on these securities as well as a “distrust” premium on the counterparty solvency at least as to some of the major players holding these securities, certainly in the lending/repo market.
By the way, I like your idea as to the funded clearing house. I think though that if either the Paulson plan or a workable insurance scheme is done in a big way, we won’t need it and the funded clearing house alone won’t be sufficient to relieve the capital impairment problem.
So we've gone from fundamental health and economic soundness to a cataclysmic collapse in the space of a month or two?
I think a more reasonable and balanced conclusion is that neither Paulson nor Bush appreciated the gravity of the situation.
And yet we do.
We don't. We roll the debt by creating more financial securities (those aren't counted in the 51T). The financial securities are used to package and resell the original debt. That merry-go-round is ending.
Greenspan said it here:
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields.
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