Wednesday, September 24, 2008

Is tihs really a crisis?

I feel conflicted. Just a week ago I was calling out for a massive bailout of the mortgage lending system. Within hours that was exactly what Treasury Secretary Paulson was calling for. And we needed to do it RIGHT AWAY! or our capital markets would collapse.

In a matter of days we went from “the fundamentals of our economy are sound” to we are facing the biggest crisis since the Great Depression. Then Paulson floats an absurd proposal that would give him constitutional shredding imperial powers, a $700 Billion blank check and complete secrecy for performing his magic. And congress has to enact this now, now, NOW!

Paulson and Bernanke say that this massive bailout is better than the alternative. The alternative: cue video of the Great Depression. And for it to work they need complete flexibility to act. And they need the largest number of institutions to participate, so no conditions should be tied to the banks participation in the mother of all bailouts, including foreign banks, and oh by the way the largest number of assets should be considered including not only residential mortgages but also commercial mortgage assets, credit card debt, and various derivatives of these. And this whole proposal is so very complex, that we (Paulson and Bernanke) don’t know that it will work or how it will work. In fact we will have to hire Wall Street experts to invent the most appropriate mechanisms for us to price these mortgage assets…yes those are the same experts who so mispriced these assets in the first place that got Wall Street into this mess, and are manifestly unable to settle on a reasonable valuation that would allow trading assets between banks today.

On the one hand, they want the most number of players involved to increase liquidity (of these illiquid assets-lol) including international banks and other market players involved to increase (?) competition in the price discovery side. But on the other hand they want to inject funds into the banking sector to keep it lending, which is why they need so MUCH money. They have intimated that with the $700B they intend to pay above market prices (or above distressed market prices) for the mortgages. They keep telling us that we need as many participants involved for this to work. And that it must work.

If we are giving bankers tens if not hundreds of billions in “free money” then you can bet your ass they will jump at it. But the moment congress suggests restrictions on CEO compensation or equity interest in return for the bailout, Paulson says that would limit the number of institutions that would participate. Which leads me to wonder: is this really a crisis?

1) Yes it is a crisis. We are looking at the end of the financial world as we know it unless the taxpayer rolls over. Without a bailout the economy comes to a screeching halt. Even knowing this fact Wall Street folks (who have enjoyed ALL the benefits of the last decades economic growth) have their heads so far up their butts that they cannot accept a $700,000,000,000 lifeline if it asks the slightest sacrifice of them.

2) No it is not a crisis. This is one last orgiastic money grab on behalf of Wall Street billionaires. (Given the original absurd Paulson proposal, the suddeness of the crisis, and the rush rush attitude of the executive branch, I'm very suspicious.)

If this request was coming from any administration but this one—which has taken every action to help the wealthiest, crammed deregulation down our collective throats and lied us into a made up war and has demonstrated manifest incompetence on virtually every front—I would be willing to give them the benefit of the doubt and take them at their word. BUT NOT THIS TIME! Their credibility is gone.

If our congress does anything we must insist that we have a much smaller, targeted bailout that addresses very specific pieces of the crisis with greater transparency.

My first advice is to limit this whole deal to residential mortgages, residential mortgage-backed-securities and potentially the very simplest derivatives of these. Second advice is to encourage the Wall Street banks that created these “toxic” overly complex securities to unscramble them. Set up the buyback such that it pays a modest premium for the simplest mortgage securities in each class, or only buys the simplest securities.

We need to stop throwing more stuff into the pot making it bigger and more complex and start simplifying. Stop trying to scare Americans into rapid unreasoned action—we are tired of it. If anything start trying to scare Wall Street into accepting a deal that saves their hides.


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