Category Archives: Bailouts

Financial Armageddon: Weapons of Mass Destruction, the Sequel?

Posted on September 22, 2008 | Leave a comment

Monday, September 22, 2008

Much in the same way the Bush Administration convinced us of the need to invade Iraq, once again it is asking us take emergency action to spend hundreds of billions of dollars to solve a problem that we have little more than its word to believe exists. Sound familiar?

We need to calm down, and demand that the Administration answer the following questions, among others, in detail and with hard evidence to prove their assertions:

1. Define the objective(s). What, specifically, can we reasonably expect to accomplish by spending the $700 billion dollars our Administration has requested?

2. Other than the understandable panic and tightening of credit associated with our government leaders predicting a worst case scenario for the economy, what specific evidence is there that our financial markets will not recover in due time, on their own? What proof is there, in other words, that the private sector will not recover, that there will be vast and horrendous repercussions for our citizens, without government assistance?

3. How does the government explain the resolution of problems at Merrill Lynch, Lehman Brothers and other corporations involved in trading (Constellation Engery, for example) without the need for government support? Please include in that list the pending merger of Wachovia with Morgan Stanley which was derailed when the Administration allowed Morgan Stanley and Goldman Sachs to become commercial banks.

4. Other than spending $700 billion to buy defaulted subprime mortgages, what other solutions might accomplish the same objectives, perhaps even more effectively? Alternatives to be considered might include: Guarantying the firms who hold these notes against losses resulting from their liquidation, including the sale of collateral real estate, to be paid when those losses are realized, and not before. Directing our resources to protect those ordinary citizens who may eventually suffer as a result of this bad debt – given that it’s not clear what these losses might be, if any. And my personal favorite, doing nothing at all.

5. Precisely how was the $700 billion calculated, within what margin of error? What assurances do we have that this $700 billion will accomplish the objective, rather than just being the down payment on a more expensive program with additional installments to come?

6. And finally, what specifically are the negative consequences of our incurring this gross amount of additional national debt, while interfering with the natural corrective measures and other competitive behavior of our economy?

For being asked to spend $700 billion dollars we don’t have, and to put control of that money in the hands of a single person without meaningful oversight, answering the questions I’ve posed would seem to be the least our government can do – which is ironic given that doing the least it can do is certainly a major explanation for how we got into this mess.


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Thinking Out Loud About Our Government’s Turning Morgan Stanley and Goldman Sachs Into Banks

Posted on September 22, 2008 | Leave a comment

Monday, September 22, 2008

I’ve got to be careful here. Things are moving so fast in Washington that it’s hard to keep track of the specifics of what’s happening, let alone conduct a thorough analysis of the situation – all for what amounts to a hobby while I work, probably like you, 10+ hour days making a living doing something else. And then there’s the problem that, while my education and experience are helpful, I’m no world class authority on finance and banking. On the other hand, those shortcomings have never stopped me before, so, what the hell, here goes…

My gut and my brain both tell me that allowing Morgan Stanley and Goldman Sachs to function as banks may be a bad idea, certainly one that needs a lot more careful consideration on the part of the Bush Administration and Congress. True, as banks they will be more tightly regulated, and will have access to capital from depositors and from within the banking system itself the way commercial banks do. If only that was all there was to it.

1. Morgan Stanley and Goldman Sachs made some bad investment decisions. So, instead of allowing the economy to impose its own, naturally occurring penalties, we reward them by allowing them, in perpetuity, to be commercial banks.

2. In addition to allowing them to be commercial banks, are we also going to buy the bad subprime debt they’re carrying on their books?

3. There are other ways to regulate investment banking behavior other than turning the investment banks into commercial banks or “thrifts.”

4. In the process, we’re not only pulling the rug out from under Wachovia which was negotiating a merger with Morgan Stanley, we create two huge new competitors in a commercial banking system our own government tells us is already struggling. (Talk about interfering with the economy.)

5. I’m fairly certain our regular banks are constrained by law and regulation in their ability to also engage in investment banking and securities transactions. The idea is that we don’t want unacceptably high risks to be taken with our deposits. Doesn’t turning two of the world’s largest investment banks and brokerages into commercial banks fly in the face of that general principle? Are they no longer going to be allowed to do investment banking?

6. What about the other investment banking firms – such as Merrill Lynch and Lehman Brothers – who managed to save themselves without being allowed to be commercial banks? Are we penalizing them for having resolved their problems without public assistance?

Yes, I have more questions than answers, but the one thing I am sure about is that our government is moving way too fast. In what’s got to be the “bum’s rush” of the decade – any decade – the Administration is asking Congress to give our the Secretary of the Treasury what is basically unfettered authority to spend upward to $1 trillion dollars to resolve the current crisis – the extent of which, and the array of possible solutions for which, we have yet to confirm or debate. And they expect Congress to legislate this authority by Friday. One unnamed media contact in Congress went so far as to describe the legislation they have been asked to approve as a “Financial Patriot Act.” To quote from Senator McCain’s reaction, “We can’t solve a problem that has poor oversight with [a solution that has] no oversight.”

We need to calm down. Congress needs to stay all Administrative actions, including this conversion of investment banks into commercial banks, until it (Congress) has had time to study the situation more carefully.


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Dear Senator Obama:

Posted on September 21, 2008 | Leave a comment

“… how about if you stop accusing Senator McCain of “flip-flopping” just because he has the intelligence and experience to have a less than simple-minded, formulaic approach to resolving our many national problems?”
Sunday, September 21, 2008

Hello. Because I know you are sincerely committed to quality and continuing education, I would like to make the following two points about your campaign’s interpretation of Senator McCain’s recent statements about the economy. Here goes…

1. It is entirely possible and often the case that the fundamentals of our economy would be strong, even while the economy itself is dealing with serious problems. You, for example, are working hard to become President of the United States. In the process, you have had a number of problems, such as the mess with Reverend Wright, and yet, throughout it all, I’m sure you never doubted that the fundamentals of your person and your campaign remained strong – strong enough to recover with a major taxpayer subsidy. See how easy that was?

By the way, on this first point, if the fundamentals of our economy were not strong, how do you explain the way the difficulties at Merrill Lynch, Morgan Stanley, Lehman Brothers, Constellation Energy and others are resolving themselves – and doing so without government assistance? How do you explain the way our banking system continues to function – albeit a bit skittishly, which is to be expected in light of the profoundly negative prognosis we keep hearing from Washington? There is and will continue to be less credit available, at higher costs to more accurately reflect risk, but then the problem we’re trying to correct is that there was too much credit available at rates which were too low. Tightening the availability of credit is the whole idea of “The Big Fix” our Congress is about to debate. If the fundamentals of our economy are not strong, how is it that economy is moving so quickly to repair itself?

2. It is also entirely possible to be generally opposed to government intervention in the economy, while at the same time being in favor of some specific regulatory programs. I am, for example, adamantly opposed to our buying the bad debt these various financial institutions are carrying on their books, in favor of allowing the economy to handle that problem on its own, while at the same time being in favor of limited regulations designed to prevent the continued origination of such paper and its derivatives. What’s wrong with that?

I suspect that both you and especially Senator McCain agree that we need to leave our economy alone, within limits designed to prevent adverse practices which tend to escape the natural self-correcting tendencies of our capitalist system. The only debate between you and Senator McCain is the extent of those limits, Senator McCain being less restrictive than you seem to be.

Certainly, Senator Obama, you’re not suggesting that your approach to economic, social and national security policies is “all or nothing,” that we should do everything one way or another according to some rigid doctrine without the common sense flexibility to make adjustments depending upon circumstances. Of course not. So, how about if you stop accusing Senator McCain of “flip-flopping” just because he has the intelligence and experience to have a less than simple-minded, formulaic approach to resolving our many national problems? …and I’ll ask him and his campaign to do the same for you.

Thank you.


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Our Government’s Bailout Plan: The Assumption of Armageddon

Posted on September 20, 2008 | 13 comments

“What if we just left well enough alone and let the economy do its thing?”
Saturday, September 20, 2008

Our government, which does not have a particularly good record for handling the economy, and whose policies almost certainly facilitated, in not outright contributed to the current housing and financial sector crises, is suddenly operating at warp speed on the assumption that we are teetering on the verge of the second Great Depression. I’m not exaggerating or jumping to conclusions. That’s what they’re telling us, but where are the signs of this pending financial Armageddon?

Keep in mind, our government’s bailout plan is coming from the same officials who didn’t see this crisis coming, but who are now in a panic to stop it. This isn’t studied management. It’s a knee-jerk, “Yikes!” reaction. If they were oblivious enough to have missed it or even contributed to it, why should we have any confidence in their ability to fix it? My overwhelming sense is that our government, at least in so far as the economy is concerned, is being run by people who have no idea what they’re doing.

Has it been too easy for too many people to buy homes? Sure. Have certain Wall Street firms gone nuts doing overly leveraged, high risk business that never should have been funded? Absolutely. Are there large numbers of innocent people who will suffer as a result of these Wall Street indiscretions who we need to help? Definitely. So, other than helping the innocents, what if we did nothing? On what basis are we getting ready to spend, by all accounts, between $500 billion and $1 trillion to save investment banking firms which clearly haven’t behaved in a way that justifies their continued existence? What if we just left well enough alone and let the economy do its thing?

At the risk of sounding like John McCain – not that there would be anything wrong with that – except for subprime mortgages, their implications for the housing sector and, most importantly, their relationship to our nation’s largest investment banking firms, the fundamentals of our economy are holding. The banking system, far from hanging on by a thread, continues to do business and is adjusting its behavior with remarkable speed. Two of our largest banks are swallowing up two of our largest investment banking firms – and doing it without government assistance. Bank of America has purchased Merrill Lynch. Wachovia is negotiating to acquire Morgan Stanley. Lehman Brothers has just been sold to Barclay’s Bank – again, without government assistance. If we can just get the government to procrastinate a few more months, the economy may resolve the current financial crisis on its own.

In the meantime, the availability of subprime mortgages is evaporating from the housing market. Families who shouldn’t have been able to buy houses will have to rent. Others will have to buy more modest homes. People’s expectations will have to be downsized, but then they were obviously out of line with reality, so they need to adjust. So there will be less personal and business credit available, at rates which more accurately reflect the risks which lenders are taking. Who knows, American’s might actually start reducing the extent of their personal debt in favor of saving. You remember savings? Maybe you don’t, but it’s a good idea, sort of like having an extra bottle of water or frozen Lean Cuisine dinner in your freezer, just in case. The point is, making adjustments is what a fundamentally strong, mostly free market economy does periodically to fix itself.

I just don’t see it. The stock market isn’t real. It’s a speculative market. Real is the way our domestic car manufacturers have failed to innovate. Real is our over-dependence upon foreign oil. Real is a struggling education system that is having trouble producing the work force we need for this generation, let alone the next one. Real is a lack of competitiveness in international markets. Real is our government’s inability to live within a reasonable budget – and these are the people we’re trusting to cure excess on Wall Street?

Let’s help the innocent who will be hurt by the failure of the Wall Street giants, but we need to demand that Washington calm down and prove that we really are on the verge of the next Great Depression before their actions put us into one – only to have them look back, retrospectively, and argue, “See, I told you so.”

If we’re hell bent on spending $500 billion to $1 trillion, there’s got to be something better we can do with it.


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Our Government’s Bailout Plan: Holding our economy hostage.

Posted on September 19, 2008 | Leave a comment

To paraphrase the late Senator Everett Dirksen, “A trillion here, a trillion there, pretty soon you’re talking real money.”

Friday, September 19, 2008

This situation is beyond ridiculous.

I don’t know about you, but lately, ever since our national financial crisis started coming to a head, I’m been feeling a lot like a sap. I can’t get over the impression that the obviously overpaid managers of our most prominent financial institutions are holding our economy hostage to save their collective asses at our expense, that is, at the expense of ordinary Americans and our progeny for perhaps generations to come.

My gut tells me we should dismiss these troubled institutions with the old phase, “Never write a check with your face that your ass can’t cash.” (Don’t you just love that expression?) Unfortunately, we’re apparently now to the point that, if we don’t do something, large numbers of regular people will suffer. Okay, I get it, but would like to make a seasoned suggestion to at least minimize the cost of a solution while imposing some real, albeit minimum consequences on the firms that let all this happen.

Do not buy the bad debt these institutions are holding, and do not loan them money. It’s way too expensive, much more than we need to spend to fix the problem, and it sets an horrific precedent.

Instead of buying the bad debt, all our Government needs to do is insure – under carefully controlled circumstances to avoid cheating – the potential losses which these institutions might incur pursuant to an orderly, properly paced liquidation of their troubled assets. Losses pursuant to liquidation, particularly given that this bad debt is largely collateralized by real estate, are likely to be far less than the balances of these bad debts.

We can still protect these companies, but there’s no reason to put the cost of a solution up front, or to save them the effort of getting themselves out of trouble. Let the companies manage the liquidation of these assets at their own expense. Our government doesn’t do stuff like this well.

In return for this insurance against losses, all the offending executives are out, without their whopping severance and retirement packages. These executives are being fired, and should not be allowed to benefit from the extraordinary costs their greed and poor judgment have imposed upon the public.

And finally, we should demand a premium for this insurance in the form of a special, priority class of stock in these companies which we can eventually sell and which will assure us a reasonable share of these companies’ corporate profits which they will enjoy precisely because the American people have stepped up to save them.

There. How ‘bout them apples?


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The Irony of the AIG Bailout

Posted on September 17, 2008 | 2 comments

Wednesday, September 17, 2008

As we all know by now, a great deal of the current mess in our financial markets has been caused by the financing, insuring and sale of subprime “paper.” We’re talking about loans made to consumers whose credit histories and incomes did not, in and of themselves, justify the credit they received. Not surprisingly, these loans have failed at a high rate for which the banks which financed them, the companies which insured them – companies like Fannie Mae, Freddie Mac and AIG – and the Wall Street firms which purchased them – like Merrill Lynch and Lehman Brothers – were unprepared to handle.

Precisely because subprime loans are so risky, they would be made at unusually high rates of interest unless they’re insured or sold. Insured loans and loans which lenders sell are less risky, which encourages them to make loans they wouldn’t otherwise approve, bringing home ownership within the reach of Americans at the lower end of the credit spectrum. The risk of failure is still the same. It’s just that a portion of that risk has been passed through to the insurers like AIG and to Wall Street firms who purchase packages of these subprime loans through what are called “securitizations.” By securitizing the loans they originate, the lender (a bank or mortgage company) sells its loans, transferring the risk to the hedge fund or investment banker that bought them.

Yesterday evening, at 8 PM, AIG accepted a proposal – as if it had any choice — whereby the Federal Reserve agreed to lend AIG $85 billion, at a high rate of interest, collateralized by a zillion dollars of assets which AIG needs to sell over the next two years to pay the government back.

Here’s the irony… In order to bail out a giant insurance company which is in trouble for insuring subprime mortgages (and making other questionable investments), our government has made its own subprime loan to a debtor whose ability to repay those $85 billion is questionable. And who stands behind the Fed? Who is to the Fed what AIG was to the banks that originated all those subprime loans, and to the Wall Street firms that bought them? We are.

So who’s left to bail us out?


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