Tuesday, September 30, 2008

This is Dr. Frank-n-furter.

He's our new cat.

I'm clueless about the financial situation of this country. If things are truly as desperate as they sound, OK, fine, bailout. It does make me nervous that the only stock that went up yesterday was Campbell's soup and I worry about the world financial structure. And as some have noted, years from now the government could make money on the deal. TheCSO mentioned yesterday that when Sweden had to bail out, they cancelled all of the bank stock and thus made the bank stockholders bail first. Seems reasonable.

But I can certainly understand the concerns behind giving a guy who was denying that there was a crisis a mere two weeks ago 700 billion dollars and expecting him to price all those securities accurately. And this whole bailout thing worked none-too-well in Japan fifteen years ago, and continues to work none-too-well as the bailing out on the domestic side is still going on. And I don't like it that smart friends of mine who said "Hmm... Sure mortgages are cheap, but we're not READY to buy a house yet" are going to have to pay the bill for people who made less reasonable choices.

It's interesting to me that most of the liberals I know view libertarians of being puppydogs to big business, but most of the libertarians I read are against the bailout. Here's an example.

So, basically, I have no idea.

Hey! Look! A kitty!

CC

29 comments:

Bill Baar said...

There is a crisis... it's just a bit up in the air if Government can help, or just make it bigger... but I don't doubt there is a crisis... I don't doubt the fundamentals of the economy aren't good either... it's just that the Gov can flush those fundamentals down the tube too..

...tacking on the payout for ACORN convinced me it was best to wait a few days to sort this out.

As Senators (one representing me!) I think it would be wise for both of them to suspend their campaigns for a a few days and return to Washington to sort this out.

I consider it part of their jobs.

We've had planty of campaigning over the months. It's time we watched them to their job for a a few days.

Bill Baar said...

I mean I don't doubt economic fundamentas are good... I think they're good... it's just Gov can take a crisis and make sure it poisions the whole economy.

The mumbo jumbo about the current mess being the result of banking deregulation a sure sign talking-points had taken over economic realism.

Chalicechick said...

(((As Senators (one representing me!) I think it would be wise for both of them to suspend their campaigns for a a few days and return to Washington to sort this out. )))

I could not disagree with that more.

McCain's presence only seemed to fuck with the process when he tried that. This is going to go best as a bipartisan effort and if you throw some presidential candidates into the mix, suddenly everyone is focused on not solving the problem, but making thier guy look good, themselves look good and everybody else look bad.

CC

Joel Monka said...

I'm torn on this. Left alone, the economy would indeed fix itself in the end- the free market does work, and the way one knows the best way to operate is to watch those who choose unwisely fail. However, that's also an argument for not giving medical treatment to people who smoke or drink. Yes, if the economy crashed and burned, the economy that rose again afterwards would be stronger, more efficient, better... but crashes hurt; evolution is a painful process. This is like deciding about undergoing chemotherapy; the treatment is only just less lethal than the disease. My instincts are against the bailout, but I also know that sometimes the truth is counterintuitive, and I'm not competent to have an opinion- probably only a few thousand in the country are, and even they could be wrong.

Cute kitty! Boy or girl? How old? Rowdy?

Chalicechick said...

Boy!

Four Months!

Very affectionate, somewhat rowdy.

We only really have him because he was going to a shelter if we didn't take him, but we like him.

CC

PG said...

...tacking on the payout for ACORN convinced me it was best to wait a few days to sort this out.

Wow, still pushing this even after I pointed out that ACORN wasn't mentioned in Dodd's first draft and that the money would be disbursed to state and local governments that would take applications from groups that do development and management of affordable housing rather than the counseling type stuff ACORN does.

The repeated attempts by Obama opponents, who aren't even reading the legislation in its various iterations, to claim that ACORN was in Dodd's first draft of the bailout bill is the perfect example of why presidential election politics need to stay far far away from this legislation.

Bill Baar said...

Obama represents Illinois (me) he should be there whether he adds anything or not.

PG... This bill creates unprecendent authority for SecTreas to spend exempt from Fed Contracting Regs... ACORN and who else couldn end up the beneficiary...

Yep, I went both McCain and Obama in DC doing their jobs for a few days. It's not like voters haven't seen enough of them on the stump.

Chalicechick said...

(((Obama represents Illinois (me) he should be there whether he adds anything or not.)))

So, even if it makes the process worse, you want them there just because?

CC

Bill Baar said...

CC...yep...I want him there so he can't disclaim responsibility later. (Although Democrats prone to claiming they've been bambooozled and so on... I was a big Biden follower and he played big role in convincing me on Saddam and Iraq).

Here's a good column today on the immense power this bill would have conferred on the SecTeas.

I don't want my Rep sitting this out. Right or wrong I want his vote on record.

They'll be another election and he'll be judged on his votes.

Bill Baar said...

While few other details emerged about the contracting provision, it appears the language would have given Treasury the ability to award contracts of nearly any value without any competition. The prospect of a government agency with unlimited and unregulated purchasing power concerned some government observers.

I'm from Chicago. The betting is Bill Daley gets SecTreas... Look at all the people in jail now in Illinois... The Gov could be indicted in the next few weeks...

I want Obama on record with a vote like this. I don't him to say gosh this was just thrown at me... along with authority for $700 billion...

Chalicechick said...

(((I'm from Chicago.)))

Really? You hadn't mentioned.

CC

Bill Baar said...

Really? You hadn't mentioned.

Windy city....

Obijuan said...

Your new kitty looks like my new kitty.

Joe The Math Guy said...

CC--I can see the argument Bill is making--but I think I agree with you. The problem is that McCain and Obama would being going as "Presidents in waiting," not Senators. (At least as far as I can tell.) What fucks things up is the disconnect between the enormous authority one of them is about to have, and their current lack of authority. So I REALLY think that right now they both need to stay away from Washington.

Heh. While they still can.

Joe The Math Guy said...

Y'know, this may be the most serious discussion ever to ensue following the words "This is Dr. Frank-n-furter."

Chalicechick said...

I find the mix of economic, political, and kitty opinions quite pleasing.

CC

Joe The Math Guy said...

Cute kitty, CC, but, well, he doesn't REALLY look like an alien transvestite.

Chalicechick said...

Well, when you see a kitty that does, YOU can adopt him, name him that and I will truly have been bested.

CC

Comrade Kevin said...

This is a complicated mess and like many Americans I have a tendency to discount Washington hyperbole. So no, I don't support the bailout one iota.

These times are full of needless hyperbole enough as it anyway. If anything needs to be suspended, it's this degree of hype.

ogre said...

CC, Frank-n-furter's cute (devious kitten device, that). Prepare for more mayhem.

Bill, "it's just a bit up in the air if Government can help, or just make it bigger" -- the answer is "Yes."

Government can help. That's not really a question. The question is, can this pack of greenback-bellied boobies make it better (and for whom)? The SecTreas's proposal makes it clear that no one (literally) should put any weight on his opinion. Why $700B? Because it's a big number that will get attention. Why no oversight or review of the actions of the Bailout Dictator? Um. Can you say trainloads of unmarked $100 bills just aching for good homes in numbered accounts? Dear god, that legislative proposal alone, were it not for the fact that there's the pressing crisis and that the tragicomedy in three unnatural acts of this administration is coming to an end, ought to have resulted in his impeachment (incompetence, attempt to mug the Constitution...).

Expecting either candidate to play a major role in drafting the recovery act is nuts. Neither sit on the appropriate committees to have any claim to expertise or insight. McCain airdropped in to save the day--without even having read the insanity proposed by the SecTreas.

All that you'll get from either of them are going to be their votes on whatever finally gets passed out of the House (which is constitutionally where the bill has to come from--which makes demanding immediate senatorial attention all the sillier). You want them in D.C. flitting around pretending to be working on this issue... when they have no real input until they get whatever the House crafts and passes? The Senate is going to play the role of saying yes (probably) or no (if the House passes something so ludicrous...). The odds of any senator who's not on the appropriate committees having any appropriate and meaningful influence on the legislation at this stage is tiny.

You're a publicly self-labeled Obama loather, and you want what? Him to go insert himself as a not-member-of-the-House, a not-member-of-a-related-Senate-committee... into the negotiations of the House?

The Senate isn't going to be the house that sorts this out. That's why everyone's watching the House.

Unless you think we should ask Gov. Palin to tell us how to resolve matters, too? I think I'd rather go up and see what's on the interdimensional alien transvestite's slab.

And no, the fundamentals of our economy are not sound, or people wouldn't be running around talking about the worst financial crisis since the Great Depression. You think Obama's the most corrupt and corruptive figure in patent leather shoes and you want him fully engaged in fixing this? Take a few deep breaths. You're not sounding well oxygenated.

Joel sounds more rational right now. Yes, left alone, the market would correct itself--probably after cratering spectacularly. We'd recover (something) eventually. But the price of that bit of purist free market faith doctrine would be excruciatingly painful and destructive. Since the purpose of the republic is the common good and domestic tranquility, and not the protection of the dogmas of pseudo-Adam Smithism, looking for a way to save millions from serious suffering seems like a perfectly reasonable and rational thing to do.

I'm not at all convinced that inserting all the presidential politics we can into the process would help in the slightest.

Bill Baar said...

I'm not at all convinced that inserting all the presidential politics we can into the process would help in the slightest.

Given a choice to hear a politician talk on a tough issue, and vote on a tough issue, I want to see the vote.

If neither of these Politicans can bring any value to a Political Process, then neither of them has any biz as Prez.

PG said...

bill, do you remember what I was objecting to, or do you just not feel it necessary to admit, "Yeah, I overstated my point"?

Your first comment said, ...tacking on the payout for ACORN convinced me it was best to wait a few days to sort this out.

When I pointed out that there was no payout to ACORN even in the first Dodd draft (which is the one where Republicans claimed there was, and the provisions that they claimed were a payout were stripped from the bill before it went to a vote),
you replied,
This bill creates unprecendent authority for SecTreas to spend exempt from Fed Contracting Regs... ACORN and who else couldn end up the beneficiary...

Please tell me that as you are commenting with your Chicago wisdom on a major piece of economic legislation, that you understand the difference between specifying that a particular entity will get the contract, and saying that disbursement will be in the discretion of the SecTreas. (Incidentally, this is one of the differences between an earmark and a regular appropriation.)

Also, if there's still most of the $700 billion around four months from now for a Sec. Daley -- since the locus of your distrust seems to be centered on anyone from Chicago, and not toward, say, Paulson -- then it can't be as much of an OMG-pass-the-bill-today emergency as is being claimed. Paulson seems ready to pump as much as he can get his hands on to prop up the financial industry as fast as he can.

Given a choice to hear a politician talk on a tough issue, and vote on a tough issue, I want to see the vote.

You'll have to explain why you think either McCain or Obama had to be in the negotiation room in order to vote on the bill. Most of Congress wasn't in that room -- it's hard to have a negotiation with 535 people participating. Hundreds of House Reps who voted on the bill never talked directly to Paulson; their concerns were funneled through House leadership. Neither McCain nor Obama is the speaker, majority leader, minority leader or whip for either party in either house.

My understanding is that a senator has to be on the Senate floor at the time of the vote in order to vote on the bill. If Obama isn't on the Senate floor if/when the Senate gets a chance to vote on it, because he's out campaigning instead, your campaign-or-vote binary will have teeth. So far, it's nonsensical.

Bill Baar said...

PG...

Yep, I want both McCain and Obama in DC doing their jobs, including voting on the floor until, this mess is over.

Whether ACORN was in the draft or not, it's the open ended contracting and suspension of FAR rules, (not done in Iraq by the way..full FAR for a War but not for this....)

... suspending any rules on $700 billion on a program that could easily be administered by Chicago guys/players/dealers... they're human cash registers. The ACORN players will just get a new name.

I mean Obama got big bucks for U of C Hospital after his wife got a part time VP job at $340k...

...it's pretty simple stuff really and Chicagos heading for the trough.

Google around for the audio of Obama solicting the teamsters endorsement in the primaries. There's not high falutten mumbo jumbo from the orator there... it's all business.

Hand these guys $700 billion and you'll see serious shearing and fleecing.

PG said...

bill,

So, seriously, you're only worried about giving the Sec.Treas discretion over $700bil if the president is a Chicago politician?

I knew your hostility to Obama was massive, but I didn't know it was so far reaching as to see him and other Chicago politicians as the only folks in government who might act venally. I guess if John McCain wins, we can disband government oversight.

And you continue without any sign of embarrassment to misstate facts.

not done in Iraq by the way..full FAR for a War

I guess because it isn't based in Chicago, you missed Halliburton/ KBR's getting billions in no-bid contracts in Iraq. KBR (Kellogg, Brown & Root) is a longtime friend of Texas politicians, including the Bushes. If you fly into Bush airport in Houston, you pass a big Halliburton facility on your way into the city.
There's an old political joke from before the 1960 election:

So Kennedy and Johnson win, and shortly after the election they're settin' around the Oval Office and the phone rings. JFK says, "It's the Pope of Rome on the phone!" Pope says, "John, my son, this is the Pope callin'. We've got a problem over here. The roof of the Vatican is leakin' somethin' fierce. We been runnin' around settin' the sacred vessels under the holes, but they fillin' up fast. Y'all reckon you could come over here and fix the Vatican roof for us?"
"Sure, Mr. Pope, sir," says Kennedy. "Just let me consult with my vice president here. Lyndon, it's the Pope on the phone, wants to know if we can go over there and fix the Vatican roof for him."

Lyndon drawls, "That's fine with me, John. Just make sure Brown & Root gets the contract."

Hate to destroy your innocence, Bill, but "Chicago politics" isn't as constrained to Chicago as you seem to believe.

Joe The Math Guy said...

CC, as you no doubt know, many Libertarians are, or at least claim to be, advocates of free market economics. It's not surprising that such a person would oppose a truly gargantuan bailout like this, a point I am sure you have already worked out.

I don't know nearly as much about this situation as I might, but I do feel as if I have gotten a bit of a sense of what happened, and is happening. From what I can tell, "Fannie Mae" and "Freddie Mac" have been getting special treatment from the government for years, at least through the '90's and the 2000's. In return they were engaging in practices that an ordinary business would have to consider too risky.

It seems really, really reasonable to me to suggest that this was a big part of the reason why they wound up going under. It further seems reasonable to suggest that bailing them out...especially to the tune of a number of dollars that sounds like it ought to have to do with astronomical distances rather than economics...is not a good idea. It would just be throwing good money after bad.

What I am seeing here is that Government isn't being asked to help. It's a branch of the government that is asking for help, they and their two financial lapdogs. It's the US taxpayer that is being asked to help, because that's where the money actually comes from, most of it, of course, from the middle class. Do we really believe that those selfsame taxpayers are going to wind up benefiting from a bailout? I have to confess: I don't. To me it only sounds excruciatingly painful and destructive.

PG said...

In return they were engaging in practices that an ordinary business would have to consider too risky.

This seems to be a popular misunderstanding of the financial crisis. If the following looks incredibly dull, I recommend listening to NPR's "Giant Pool of Money" to get the gist. (They had a more recent podcast that talked about short-selling, but I felt like that was unfair to Chairman Cox because it ignored the difficulties in following up on EVERY SINGLE transaction that doesn't get settled at T+3. It's been several months since I heard it, but as I recall "Giant Pool" doesn't say anything that contradicted my Securities professor's take on this. He has me convinced that the credit rating agencies are the most to blame, but the bastards have the 1st Amendment to protect their expressions of "opinion.")

If you look at a timeline of the last 15 months, you might recall that Bear Stearns was in trouble before there was much concern about Fannie and Freddie. In summer 2007, two of its hedge funds collapsed and it finished going under in spring 2008.

The basic underlying problem for all of these institutions is that they became excessively leveraged (that is, they had too much more debt than assets) and too many of their assets were based on various loans. The most problematic type of asset right now is the mortgage-backed security.

The way this works is that instead of lending in the traditional fashion, where the bank checks your credit, gives you some money, charges you interest and is the one to collect and keep your payment each month, lenders instead were making the loans and then repackaging them with thousands of other mortgages. They asked the credit rating agencies to give these bundles good credit ratings so that the bundles could be cut back up into securities that were marketed to financial institutions as being "triple-A" rated.

The reason to bundle them up and then cut them back into pieces was to even out the risk. Any individual mortgage might default, but the theory was that a 1% share of a thousand mortgages would still pay because if only 10 of the 1000 default, you still collect good interest off the rest.

This is a valid theory so long as two things are true: 1) the mortgages were to good credit risks who are no more likely to default than the average person; and 2) housing prices would never decrease, so that even if the person defaulted on the mortgage, the underlying asset (the house) would be worth more than the money that was loaned in the mortgage.

1) failed because the lenders no longer had an incentive to lend only to good risks. If Bob the lender can repackage these mortgages into securities and sell them to Bear Stearns, he no longer has to care whether the mortgage gets paid over the long run. He makes his money back from the loan immediately instead of over 30 years. Because lenders no longer bore the risk of defaults, they began lending money to people who were bad risks, which increased the rate of defaults on those mortgages dramatically above the previous average rate of defaults.

2) due to easy credit, there was an excessively high demand for housing to own, which led to overbuilding and a housing “bubble.” When the bubble popped, home values declined. In many cases, especially with mortgages that had no down payment, the lender had loaned more than the house was now worth. Because a mortgage is a secured loan, where you are not supposed to get more money than the underlying asset (the house) is worth, if someone defaults on the loan the bank is supposed to be fully compensated by taking the house. However, if the value of the house in August 2008 is half of what it was when the loan was made in August 2006, then the loan was not so secured after all and the "owner" of the mortgage (which now has been split up into securities, which makes it difficult to say who the owners really are) has lost a lot of money.

Pretty much all of the investment banks bought into these mortgage backed securities. AIG had a different but related problem: it had gotten heavily into credit default swaps, where it essentially insured against people's defaulting on their loans — again, a perfectly good business model so long as you have a good idea of how likely these defaults are. Similarly, AIG did not calculate that the likelihood of defaults was going to go up hugely, so it got stuck paying out for billions in defaults, to the point that it no longer had enough money to keep going.

The House Republicans did make a significant change to the bill by inserting an insurance provision. Because it is not mandatory and does not cover a larger group of financial institutions than those that already are messed up, it at best can have only a psychological effect. All insurance works on the premise of a very large pool that includes both the healthy and sick. An insurance pool composed only of sick companies — the ones that are heavily leveraged and full of bad assets — either would have to demand a lot of cash from them they don’t have, or wouldn't actually be able to pay out when demanded to do so. However, because some people believe that the securities aren’t really so toxic, but are just being under-valued in a short term panic, if the sick companies are given the psychological confidence through an insurance pool that their assets are insured, they can begin selling those assets to non-government buyers.

Fannie and Freddie, *because* they were specifically in the homeownership business, naturally ended up with a large proportion of the mortgage-backed securities, but the investment banks -- Bear Stearns, Lehman, Goldman, Morgan Stanley -- all engaged in these same "too risky for ordinary business" practices. Wachovia bought up a big lender that was heavily sunk into housing bubbles in California and Florida, as well as doing its own commercial real estate investments based on inflated prices. (Fannie and Freddie aren't involved in commercial real estate.) Washington Mutual also granted too many subprime mortgages.

In particular, excessive leveraging has been the underlying issue in just about every bailout we've done, from S&Ls in the '80s to Long Term Capital Management in the '90s to the i-bankers today. There's always such a great upside to leveraging when things are going well that people don't plan ahead for the crash. (Or they insure against it through AIG and cause *its* crash -- $37bil of the money the Fed is loaning to AIG is going right to i-banks.)

The government wants to intervene essentially to stop the cycle of paranoia. Mark-to-market accounting on assets (the requirement that your balance sheet reflect the most current price of your assets) means that if there's a dip for one day like yesterday, you have to show it on your balance sheet, which makes you look like a bad risk, so you can't get credit, so you're selling off these assets at fire sale prices because no cautious person wants to buy and the risk-friendly folks can't get credit... it's almost a tragedy of the commons, and it's a traditional government role to step in and do something to solve those.

However, it can do it with some severe penalties on the people who profited when these schemes were working well. For example, shareholders were happy with these high risk practices when they made big profits. Executives got bonuses based on those profits, as well. Everyone who got a share of the upside needs to be feeling a lot of pain in the downside.

kim said...

Cute kitty

This morning, Thom Hartmann read news articles from October 1929. They sound EXACTLY the same as what is going on now. Hoover tried to fix it by giving money to the top and it didn't work. Roosevelt tried to fix it by giving money/jobs to the bottom and it worked much better.
I would recommend that we avail ourselves of that experience, and fix this by using our government to get money into the hands of The People rather than give big checks to the guys that screwed up the economy in the first place, by not paying attention to all the times this has happened before.
Therefore, I am against "the bailout". There are other things we could do that would help us far more.

Bill Baar said...

PG...You're talking Logcap too an old DoD auditor... (I remember when Logcap was a procurement reform..not it's billed as corruptions... KBR did an excellant job as far as I could tell in Iraq).

...oddly, when Congress put full FAR onto Iraq contracts they effectively limited it to KBR and a handful of other big US companies that had that qualified with the Workmen's Comp Coverage they had to extend to Iraqi's... I think they could only get it through CNA.

When Drogan and Whitehorses committee investigates the Chamchamal powerplant deal you'll see how real Chicago politics worked in Iraq. Fitz may beat them to the punch with Rezko talking now...

Bill

PG said...

KBR did an excellant job as far as I could tell in Iraq

Your former colleagues in DOD auditing seem a bit more skeptical.