Thread: The $700 Billion Bailout Plan's Fine Print

The $700 Billion Bailout Plan's Fine Print

Commentary: A reformed Wall Streeter sifts through the details of the Troubled Asset Relief Program.

By Nomi Prins

September 24, 2008

Treasury Sec. Hank Paulson's $700 billion bailout plan now has a name: the Troubled Asset Relief Program, or TARP. But even as Capitol Hill debates TARP, few seem to have noticed the proposal item that puts taxpayers on the hook for future bailouts. It's in Section 6, and the key phrase is this: "The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time."

What does "at any one time" actually mean to economists? It means that if everything we American taxpayers buy re-evaluates down to zero, we get to buy more. That's hardly taxpayer "protection." With several hundred billion dollars of write-downs already announced this year by the part of the industry compelled to post their losses, it's a safe bet that $700 billion worth of the junkiest assets in existence will be heading to zero the second they are purchased.

But that's not all the bad news. With Sunday's announcement that Goldman Sachs and Morgan Stanley have decided to become bank holding companies, the last pretense of respect for the Glass-Steagall was dropped.

The Bank Holding Company Act of 1956 prevented bank holding companies from engaging in non-consumer oriented banking activities, like investment banking. It also prohibited such entities headquartered in one state from acquiring banks in another state. The interstate restrictions were gutted in 1994, and the 1999 Gramm-Leach-Bliley Act took care of the rest.

At first this meant that commercial banks could buy investment banks and insurance companies, hence Citigroup (which is a combination of Citibank, Travelers Insurance and Salomon Brothers investment bank), and the latest incarnation waiting to post lots of losses, Bank of America-Merrill Lynch. But even with a new name, Goldman Sachs is still an investment bank, in the same way that a horse by another color is still a horse. Changing its status to bank holding company will mean access to the bailout fund, and give it the ability to buy any commercial bank out there. Which it likely will.

Nonetheless, that looming problem wasn't addressed by Congress Tuesday. Instead, Sen. Chuck Schumer (D-NY) responded to TARP with THOR (Taxpayer Protection, Housing, Oversight and Regulation) and warned, "the financial system is clogged, and if we don't react the patient will suffer a heart attack. So we must act and must act soon…"

Somewhere, Former Treasury Secretary Carter Glass, the co-author of the Glass-Steagall Act of 1933 that separated speculative investment banks from consumer-oriented commercial ones, is turning in his grave.

As much press as the TARP vs. THOR discussion is getting, one voice of reason deserves more attention: Sen. Byron Dorgan's. As he has said, "this proposal looks to me like a stampede in the wrong direction…to reward the very people on Wall Street who created this mess, and who pocketed more than $100 billion over the last several years making it."

In 1999, Dorgan had the foresight to vote against the Gramm-Leach-Bliley Act that repealed the financial protections put in place following the Great Depression. He warned then that a 'financial swamp' would result from "the casino-like prospect of merging banking with the speculative activity of real estate and securities, and that the bill will raise the likelihood of future massive taxpayer bailouts."

Dorgan was spot on. Not only are we trapped in the complex deregulated financial system that resulted, but the bailouts are just beginning.

In advocating new protections similar to the Glass-Steagall Act and the need to address this crisis not just quickly, but correctly, he's likely spot on again. If only the rest of Congress felt the same way.

Nomi Prins is an economist and Mother Jones writer.

http://www.motherjones.com/commentary/c ... print.html

http://www.ecodrivingusa.com/




Carnegie Mellon Professor: No bailout needed
by Yo yo yo
Wed Sep 24, 2008 at 10:45:44 AM PDT

PBS News Hour had Allan Meltzer, professor of political economy & public policy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute. On bailout:

ALLAN MELTZER: It's a terrible idea. It's undemocratic. It's bad economic policy, and it's bad social policy. And it has a very little chance of solving the problem in a meaningful way.

I've listened to governments tell me for 40 years that there was a crisis and the world was going to fall apart if we didn't do this or that. But there have been a few cases where they weren't able to do that.

One was the commercial paper crisis in 1970. There have been several others. The world did not fall apart. Last week, we had Lehman Brothers went into bankruptcy. Within three days, most of the assets were sold.

We had AIG turn down three offers to buy the company because they thought they would get a better deal from the government. It turned out they didn't get the better deal from the government. Now the stockholders suddenly woke up and said -- the major stockholders said, "We'd like to buy the company."

Well, that's what I think we need to do. We need to get the government's hand out of this, and let's see whether we can't get a market solution.

More...

* Yo yo yo's diary :: ::
*

Why isn't this guy testifying before Congress?

SEND THIS DIARY TO CONGRESS!!

More...

Alan Metzler: The market people caused this problem. They ought to be the ones that pay the cost of having it cleaned up.

I don't want to join a debate about different ways of picking the public's pocket. I think, if they're going to do something -- and I don't think that we really need to do anything. I've heard these stories over and over for 40 years. You know, maybe there will be a crisis.

But despite all the talk, Main Street is not doing so badly. And the fact is that they've been predicting disaster since January. It hasn't happened.

And if they're going to do something, then what they ought to do is make loans, which the financial institutions have to repay with interest. And if you think -- that's an idea which the Chileans have used in a bigger crisis than this for them in 1982, and it worked for them.

People paid back the loans. They weren't allowed to pay dividends until they repaid the loans. They weren't allowed to take bonuses until they repaid the loans. I think that's the way -- if we're going to do this, then that's the way we should do it.

I don't want to get into the distribution of income arguments that are so prevalent in the Congress. I'm against this mainly because it seems to me this is private interest activity at the expense of the public interest.

I mean, Mr. Paulson can talk about all the things that are going to be good for Main Street, but the fact is that Main Street is going to incur a huge debt and a big loss, for the reason that Paul Krugman just mentioned, because most of these assets are not worth much.

Well, let's do loans, which they have to repay with interest, and let's see what happens.

I know that many people think it can't happen. But, look, today, Morgan Stanley sold 20 percent of its company to a Japanese bank. There's lots of money out there, liquidity. The Chinese have it. Others have it. They've come in.

If the government steps aside and says, "Solve this problem," then we'll see more of that activity and people will begin to do it.

Merrill Lynch sold itself. It sold out some of its assets. It got 22 cents on the dollar. It's correct to say nobody knows how to value these things, and they won't know how to value them until the housing price reaches a bottom or is expected to reach a bottom, because you can't value the mortgages until you know what the underlying asset, which is the house, is worth. And nobody knows that.