The Great Recession - post mortem

[DaddyTorgo]

Originally Posted by chesapeake

I need to vent, here. Directly from Paulson's proposal, I insert here the entirety of Section 8:

"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."

That is it. Under the Paulson plan, he is accountable to no one. So, to your point, Marc, since his decisions are not reviewable by a court of law, and his proposal allows him to buy and sell anything he wants at any price, Paulson could buy $750 billion in mortgage-backed securities, sell it to himself for a penny, and, under this proposal, there is no legal action possible.

That said, I do not believe he intends to do that; but it is absolutely ridiculous to write a law that would give someone that ability.

The only "accountability" under Paulson's proposal is to provide a report to Congress twice a year. In that regard, the report isn't required to include any specifics. The following text would comply fully with the legal requirement for the report to Congress: "Dear Congress: I spent all $750 billion. I complied with the law and, boy, did it sure help out a lot of folks. Smooches, H. Paulson."

The language proposed by the Administration is a joke. Not that I would expect anything else from this crew.

I gotta agree. There needs to be accountability in it, and oversight of it. Regardless of how long that makes it take and what damage occurs in the meantime.

That said -- I don't blame it on the administration. By all accounts it was a Paulson/Bernanke creation. And I agree with you, I don't think they INTEND to do anything wrong with it, but to essentially give them a $750bn blank-check would be horrifically poor stewardship by our elected officials, and would personally ensure that I (i'm sure among plenty of others) would never vote for them again.

[Fidatelo]

I like Mark Cuban's idea of making the entire process transparent to every US Citizen, with his example being essentially a giant corporate eBay auction of every asset so that Americans can be assured that they are getting top dollar.

[sterlingice]

Ok, stupid question. I'm looking at this from a 20000 foot view so maybe I'm just missing some of what is going on at the ground level. Without some future lending regulation put into place, how does this not happen in the future. Things get better in a few years and there is money to be lent again, how do we avoid getting back into this mess. And, by mess, I'm referring strictly to the housing problem- not the banking issue.

As I see it, we've lost a lot of value on paper. Houses that were once valued are valued at, by the time things bottom out, roughly 40% less. So, a lot of people lost a lot of money. However, if we do something to artificially inflate these values, don't we just end up here in 20 years again when the people sell these homes and there is no one with the money to buy them up because their real value is well below what they are "valued" at?

SI

[Marc Vaughan]

As I see it, we've lost a lot of value on paper. Houses that were once valued are valued at, by the time things bottom out, roughly 40% less. So, a lot of people lost a lot of money. However, if we do something to artificially inflate these values, don't we just end up here in 20 years again when the people sell these homes and there is no one with the money to buy them up because their real value is well below what they are "valued" at?

As I see things this isn't about house prices and the actions being taken won't inflate house prices one iota.

This is about propping up the financial institutions so that a domino effect doesn't occur, what the Fed is worried about is multiple futurebank failures or simply the continuation of the current seizing up of the loan markets.

This not just impacts the financial companies themselves but also pretty much every other company as most will utilise banking institutes in some way and much of company expansion is leverages via. loans and suchlike.

[Flasch186]

Jack Welch spoke in ominous tones today.

[Galaxy]

Interesting note is Warren Buffett and his company purchased $5 billion worth of stock in Goldman Sacs.

[Flasch186]

ahem, preferred stock that is non-convertible with an option to buy 2 billion more at any time in the next X years for ~119/share. It's a pretty sweet deal for Berkshire but im not sure it's exactly the vote of confidence were looking for.

[Galaxy]

Add Washington Mutual to the next seized government asset, with help from JP Morgan. Any price tag on what the government will spend on this?

Looks like bailout plan is in the crapper due to politics as usual. Looks like the Bush administration wants to stand firm in what's it offering, despite objections from both sides.

[cartman]

Originally Posted by Galaxy

Add Washington Mutual to the next seized government asset, with help from JP Morgan. Any price tag on what the government will spend on this?

Looks like bailout plan is in the crapper due to politics as usual.

The figure I heard was in the neighborhood of $250 billion.

And the bailout plan is heading to the crapper due to the Republican caucus in the House. Not surprising, since that is the most politically sensitive group at this time. They have been manhandled by the Bush administration for the past 7 years, and they are all facing re-election. This is their last chance to show some backbone and go back to the fiscally responsible roots that they were originally elected on. The Republicans in the Senate are a lot less exposed than their counterparts in the House.

[st.cronin]

Gas was very cheap around here today, about 3.25 in some places.

[cartman]

Just saw this on another site. The amount proposed for the bailout ($700 billion) is almost equal to the amount of the US national debt at the end of the Carter administration ($930 billion). Wow.

[Galaxy]

Nice.....

[Shkspr]

Originally Posted by cartman

Just saw this on another site. The amount proposed for the bailout ($700 billion) is almost equal to the amount of the US national debt at the end of the Carter administration ($930 billion). Wow.

That's like $3 trillion today, though, right?

[BishopMVP]

Originally Posted by cartman

And the bailout plan is heading to the crapper due to the Republican caucus in the House.

The Democrats do still have a majority, right? Time for them to grow a backbone. The R's don't have the numbers to filibuster.


(Of course that avoids the point that, from what I've seen, this isn't a good plan and could be done either A) much better if they want to spend that much money or B) much cheaper if they're going for the same goals the $700b plan has.)

((The other thing I found unintentionally funny was its effect on the campaign advertisements. I saw an Obama ad today claiming McCain was planning on offering $4 billion in tax breaks for oil companies. A month ago I would have been outraged at $4billion. Today my first reaction was to shrug it off - that's 3 weeks interest at best; a pittance - before I thought it through and realized they said $4,000,000,000.)

[JPhillips]

Why should the Dems give the Republicans something to run on for the next month? I wouldn't vote for anything that didn't have the support of at least 50% of the Republicans.

[flere-imsaho]

I've been hearing more about how the Swedish government did a similar bailout in the early 90s. Basically they agreed to recapitalize the banks, but the other part of the agreement was that the government would get very big equity stakes (similar to the 79% Paulson got from AIG) which they later sold off for big money that helped defray the cost of the bailout.

Seems like common sense to me.

The Swedish example offers one way to minimize such "moral hazard" and potentially recoup some of the funds taxpayers are being asked to spend to help get the credit markets rolling again. The idea, says Lundgren, is not to just give money, but "to get some ownership (in return), and eventually be able to get some revenue back." By taking a stake in its enfeebled banks, Sweden was able to minimize the taxpayers' burden in the long run.

Sweden's financial crisis in the early 1990s stemmed from a 1985 deregulation of credit markets, which set the stage for overexpansion and bubbles in the real estate and finance markets. When those bubbles burst in the early 1990s, Sweden's currency crumbled and interest rates spiked to 500% overnight. Of the country's seven biggest banks, five needed either government bailouts or big injections of money from shareholders. The value of the country's real estate market plunged 50-60% in 18 months. "The whole Swedish banking system was off-balance," Lundgren recalls.

The government tried several stop-gap measures to no effect and in late 1992 opted for a complete re-booting of Sweden's financial system. Conservative Prime Minister Carl Bildt's administration sat down with the center-left opposition and came up with a bipartisan, multi-tiered approach. The government issued blanket insurance for a period of four years to creditors in all the country's 114 banks. It established an agency to oversee all banks that needed recapitalization and told them to immediately write down their losses.

Most importantly, the government stipulated that in order to become eligible for government funding, banks would have to give up something — namely equity — in return. In the case of one leading bank, the mere prospect of the government taking a stake was enough to persuade shareholders to dig deeper and raise money on their own. For the rest, the government was able, once the markets rebounded, to sell off the stakes it had acquired, making a profit that was effectively returned to taxpayers' coffers. At one point the government controlled more than 20% of the entire banking system.

The cash that Sweden poured into its banks at the time amounted to about 4% of the country's Gross Domestic Product. The comparable share of the U.S. GDP would be about $850 billion, or not much more than what Paulson has recently proposed . But in Sweden's case at least one half of that money, and possibly more, depending on the source, was recouped by subsequent equity sales.

One of the attractions of this Swedish model is that it reduces so-called "moral hazard" — effectively rewarding poor or reckless risk assessment — by forcing financial institutions that took the highest risks to pay towards their own rescue. And it allows the state to recoup the money that it expends to buy up the bad debt at the core of the problem.

[sterlingice]

Sounds like a good idea. What are the down sides and how has their economy performed since?

SI

[flere-imsaho]

Well, it recovered the financial system, and that's the main thing. I believe the economy has generally done well since then, although it's not too similar to the U.S. because a) it's heavily integrated into the EU and b) it's much more of a regulated economy than America's. I believe they've had some issues recently due to an explosion of welfare/health-care type costs due to very liberal immigration policies (Sweden has a very large immigrant/asylum population).

I think the main downside is that this means the banking system is, for a time, heavily owned by the government, which a lot of people don't like. I personally don't mind it, since there's a roadmap out of government ownership anyway.

[flere-imsaho]

More extensive NYT writeup including more info on how it turned out afterwards (see towards the end of the article):

http://www.nytimes.com/2008/09/23/bu...=1&oref=slogin

[Marc Vaughan]

Do bear in mind that the tax rates in Sweden are around double what they are in America ... but in return you get a very good health system and social security etc.

[sterlingice]

Originally Posted by flere-imsaho

More extensive NYT writeup including more info on how it turned out afterwards (see towards the end of the article):

NY Times Advertisement

Sounds like a good idea. I like the idea that we get some money back for it and that it removes a lot of the moral hazard. If this is what the GOP is proposing as an alternative- get your arses to the table because I think the American public would be behind this.

Oh, and I think the public still wants their pound of flesh from CEOs and board members so that clause isn't going away.

SI

[sterlingice]

Originally Posted by Marc Vaughan

Do bear in mind that the tax rates in Sweden are around double what they are in America ... but in return you get a very good health system and social security etc.

Yeah, but how does that relate to the government banking bailout?

SI

[ISiddiqui]

On the other hand:

The Paulson Plan Will Make Money For Taxpayers - WSJ.com

My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.

Well, unlike Mr. Buffett or any hedge fund, the Treasury and the Federal Reserve get to cheat. It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates -- in effect, "talking their book." While normally this creates a threat of inflation and a run on the dollar, and we may see dollar exchange rates turn south near term, don't expect it to last.

First, with Goldman Sachs and Morgan Stanley now operating as low-leverage bank holding companies, a dollar injected into the economy will most likely turn into $10 in capital (instead of $30 when they were investment banks). This is a huge change. Plus, a stronger U.S. economy, with its financial players having clean balance sheets, will become a safe haven for capital.

Europe is threatened by an angry Russian bear. The Far East, especially China, has its own post-Olympic banking house of cards of non-performing loans to deal with. Interest rates will tick up as the economy expands -- a plus for the dollar. Finally, a stronger economy driven by industry instead of financials means more jobs, less foreclosures and higher held-to-maturity payouts on this Fed loan portfolio.

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Over 10 years this could change the budget scenario in D.C., which can also strengthen the dollar. The next president gets a heck of a windfall. In the spirit of Secretary of State William Seward's purchase of Alaska for $7 million in 1867, this week may be remembered as Paulson's Folly.

[cartman]

This might be the best plan I've heard so far:

http://www.weeklyworldnews.com/celebs/bailout/

[Marc Vaughan]

Originally Posted by sterlingice

Yeah, but how does that relate to the government banking bailout?

SI

Its related because within Sweden nationalisation is a much more acceptable practice than within America, hence the reaction to such a plan might be taken differently here than it was in Sweden (and much of this crisis is 'mental' in its runs on the institutions and nerves from other banks which are making this even worse than it would otherwise be imho).

[molson]

Not sure if this has been covered here yet, but I read something yesterday about how smaller, regional banks are doing quite well amongst the carnage. They had largely avoided subprime lending and it's been business as usual.

I think I'm back behind square one in terms of why a bailout makes sense. These bloated companies failed. Credit is now tougher to get sure, but it's out there if you're qualified. Why doesn't the failure of these bloated banks just create an opportunity for more smaller, more well run banks? Is it the transition period we're so worried about?

[Gary Gorski]

Originally Posted by molson

Not sure if this has been covered here yet, but I read something yesterday about how smaller, regional banks are doing quite well amongst the carnage. They had largely avoided subprime lending and it's been business as usual.

I think I'm back behind square one in terms of why a bailout makes sense. These bloated companies failed. Credit is now tougher to get sure, but it's out there if you're qualified. Why doesn't the failure of these bloated banks just create an opportunity for more smaller, more well run banks? Is it the transition period we're so worried about?

It's a panic thing - wealthy people (and believe me, the FDIC definitely has me covered many, many times over so I'm not in that boat) are pulling their money from the banks. If you're taking millions out of because you think they're in trouble why would you have confidence to go stick it in a regional bank where your money isn't any more guaranteed?

The banks need the deposits so they can lend money to keep the economy rolling. Failure of massive banking organizations like WaMu is hardly going to inspire the confidence of those with that money the banks so badly need to go put it anywhere but where it will be the safest.

You're definitely right in that not every financial or banking institution is bad but the fear in the market is there and we need something like the bailout or the FDIC to raise the guaranteed amount to bring the confidence back to the entire financial system right now.

[SirFozzie]

Saw a post on RCP that the bailout will not be voted on until Wed... at the earliest?:

Ah, here's the exact quote:
ABC's George Stephanpoulos reports: Senate sources say a Senate vote on a bailout bill "unlikely" before Wednesday.

[Masked]

Originally Posted by SirFozzie

Saw a post on RCP that the bailout will not be voted on until Wed... at the earliest?:

Ah, here's the exact quote:
ABC's George Stephanpoulos reports: Senate sources say a Senate vote on a bailout bill "unlikely" before Wednesday.

Of course, this could change shortly after the Asian markets open on Sunday.

[Galaxy]

Mark Cuban is certainly voicing his thoughts on the bailout, and even proposals:

blog maverick

[Tekneek]

Forget the bailout. I read/heard that the $700 billion is roughly around $2300 per person (of any age) in the US. I'll just take the $2300 per person and let the financial institutions crash and burn.

[Logan]

Originally Posted by Tekneek

Forget the bailout. I read/heard that the $700 billion is roughly around $2300 per person (of any age) in the US. I'll just take the $2300 per person and let the financial institutions crash and burn.

And then you can take your $2300 and spend it on...?

I love people's shortsightedness.

[Tekneek]

Originally Posted by Logan

And then you can take your $2300 and spend it on...?

I love people's shortsightedness.

It was mostly a joke, but will we really have nothing to spend our money on? Hell, I wouldn't mind just holding it until (and if) it is ever worth anything again. Put it this way, I'd rather have the money than the kind of people that have been running these financial institutions. Looking at their SEC filings over the past few years, they have been throwing money around like it was candy and acting as if there would be no end to their big lifestyle. Those kind of people aren't part of the solution.

[Surtt]

Originally Posted by Tekneek

It was mostly a joke, but will we really have nothing to spend our money on? Hell, I wouldn't mind just holding it until (and if) it is ever worth anything again. Put it this way, I'd rather have the money than the kind of people that have been running these financial institutions. Looking at their SEC filings over the past few years, they have been throwing money around like it was candy and acting as if there would be no end to their big lifestyle. Those kind of people aren't part of the solution.

$2300 will not get you very far if you lose your job and can not get a new one.
YMMV

[Tekneek]

Originally Posted by Surtt

$2300 will not get you very far if you lose your job and can not get a new one.
YMMV

I would get more than that. We are a family of 5, so we would get $2300x5. See, it is per person of any age, not per adult. Plus, I've already gone roughly about 9 months unemployed this year (though now currently employed). I think I can handle it.

You don't have to be a real financial wizard to read about the mismanagement that these financial institutions have engaged in for years. It's all available for free over at U.S. Securities and Exchange Commission (Home Page) and you can easily google every term you aren't familiar with to understand every bit of each document. The dollars involved would make your head spin, especially the amounts they throw at some of the worst executives out there. When the last CEO of WaMu is slated to walk away with around $18 million after just a few weeks on the job, it is obvious that these businesses weren't really concerned about running a tight financial ship.

[Anthony]

the last rebate we got this year as part of the economic stimulus was limited to actual taxpayers from 2006. unless you have your kids working in a sweatshop and they have actual income to declare, thus making tax filing a necessity i don't see how you would expect your kids to get this hypothetical $2300.

of course, tekneek isn't a very intelligent person so i won't waste much more time entertaining this folly of an idea of his.

[Tekneek]

Originally Posted by Anthony

the last rebate we got this year as part of the economic stimulus was limited to actual taxpayers from 2006. unless you have your kids working in a sweatshop and they have actual income to declare, thus making tax filing a necessity i don't see how you would expect your kids to get this hypothetical $2300.

of course, tekneek isn't a very intelligent person so i won't waste much more time entertaining this folly of an idea of his.

Nope. I was talking about the amount of money per person that the bailout represents. That has nothing to do with taxes, rebates, or any other bullshit. It has to do with the population compared to the bailout amount. Sure, not a very intelligent person that has seen the math and doesn't have his head stuck up his own ass. Like I really need a lesson on intelligence from the biggest asshole to ever roam this board.

[Surtt]

Originally Posted by Tekneek

I would get more than that. We are a family of 5, so we would get $2300x5. See, it is per person of any age, not per adult. Plus, I've already gone roughly about 9 months unemployed this year (though now currently employed). I think I can handle it.

I am glad you would make out OK.

$24,800/year is the poverty line for a family of 5.
I would not be comfortable with a one time payment of $11,500 to take care of my family.
As I said YMMV

[Tekneek]

Originally Posted by Surtt

I am glad you would make out OK.

$24,800/year is the poverty line for a family of 5.
I would not be comfortable with a one time payment of $11,500 to take care of my family.
As I said YMMV

Comfortable? No. But there are no guarantees that you will still be able to find work after that bailout pays out either. I am much more comfortable with the money in my own hands than in the hands of the jokers that walked right into this disaster.

[Surtt]

Originally Posted by Tekneek

Comfortable? No. But there are no guarantees that you will still be able to find work after that bailout pays out either. I am much more comfortable with the money in my own hands than in the hands of the jokers that walked right into this disaster.

I agree.
I think the price of commodities (gas, food, etc.) is what is pulling down the economy.
The blue collar class doesn't have enough disposable income to keep buying iPods.

But as much as I hate giving these Wall Street types a bail out, I think it is a necessary evil. No mater what else happens, if Wall Street goes down, it will take our economy with it.

[Tekneek]

Originally Posted by Surtt

But as much as I hate giving these Wall Street types a bail out, I think it is a necessary evil. No mater what else happens, if Wall Street goes down, it will take our economy with it.

Have you given any thought to the possibility that we might have to take a hit if we really want to fix things? Sometimes in life you have to pay a heavy price to make a better tomorrow. Pretending we can keep throwing money around to solve every problem is bound to catch up to us and give us a bigger fall than we are facing today. Supposedly, we are a nation that is willing to pay the price to make things better for everyone. Apparently not this generation. We're going to keep throwing money around and pass the buck. Our government, which we elect ourselves, is making almost no attempt to pay its own debt. I cannot see how we can blame one party over another, since they have both had their day in the sun recently and failed to control spending to the levels required. At this rate, we are simply delaying the inevitable rating downgrade that the US will receive, and then the bottom will really fall out.

[Galaxy]

Originally Posted by Tekneek

Comfortable? No. But there are no guarantees that you will still be able to find work after that bailout pays out either. I am much more comfortable with the money in my own hands than in the hands of the jokers that walked right into this disaster.

You won't find any work if banks don't have any capital to loan any money to businesses and people. It's a necessary evil, and hopefully legislation is passed to tighten up lending and capitalization standards.

[Tekneek]

Originally Posted by Galaxy

You won't find any work if banks don't have any capital to loan any money to businesses and people. It's a necessary evil, and hopefully legislation is passed to tighten up lending and capitalization standards.

Suppose it doesn't matter much what individuals think anyway. This economy and government is driven by what the big entities want and not what John Q. Public wants. While I generally believe in free markets, I don't mind punishing sectors that refuse to regulate themselves. Therefore, I would like to see a wage cap levied upon any institution that takes bailout funds. This cap would limit compensation to no more than 10x that of the lowest earner at that business, regardless of whether they are a direct-hire, temp, on contract, etc. This would rein in these executives who try to run off with the pie while driving the company into the ground. If they want to make big bucks, they will have to share that pie with everybody else.

[JonInMiddleGA]

Originally Posted by Tekneek

This cap would limit compensation to no more than 10x that of the lowest earner at that business, regardless of whether they are a direct-hire, temp, on contract, etc. This would rein in these executives who try to run off with the pie while driving the company into the ground.

Actually, a 10x cap like that would leave no one capable of running the company willing to take a job in the sector. A 100x cap maybe.

[Galaxy]

Originally Posted by JonInMiddleGA

Actually, a 10x cap like that would leave no one capable of running the company willing to take a job in the sector. A 100x cap maybe.

Wouldn't this give privately-held companies a real advantage (which would really benefit private-equity companies who would take public companies private) over publicly-traded companies?

[Tekneek]

Originally Posted by JonInMiddleGA

Actually, a 10x cap like that would leave no one capable of running the company willing to take a job in the sector. A 100x cap maybe.

So? Don't take public funds.

[Tekneek]

Originally Posted by Galaxy

Wouldn't this give privately-held companies a real advantage (which would really benefit private-equity companies who would take public companies private) over publicly-traded companies?

This would really help companies that didn't get themselves into trouble and have to take welfare payments from the taxpayers. Those who managed themselves well enough to stay on their own feet could still set their own rules.

[Gary Gorski]

Why not make executive bonus based on a 5 year period instead? Are you surprised that if you tell the CEO that he gets $x millions for a one year performance that many of them did whatever they needed to do to get that bonus while they could with no regard whatsoever for the future of the company? Why should you put a cap on how much money someone can make? If they can build a business that makes enormous amounts of money year after year then reward them for doing so.

[Tekneek]

Originally Posted by Gary Gorski

If they can build a business that makes enormous amounts of money year after year then reward them for doing so.

If the lowest paid person didn't contribute to that and deserve to ride that wave with them, why not just fire them?

[Gary Gorski]

Originally Posted by Tekneek

So? Don't take public funds.

Nobody really has a choice at this point - its either this bailout happens and these institutions are saved and hopefully can begin to fix the massive mess they are in or the economy is in big trouble. As much as I hate the idea of bailing out the people who caused this mess I'd still prefer to have our economy functioning and not be thrown into the Great Depression II