OK, how well is this "bailout" going to work? (Bill passed today in the US Congress)

ishtat said:

So not only are you a "don't know," you know you don't know, dont ya know.

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I wear my ignorance on my sleeve, and I keep on getting hung up over these derivatives, which I think are just too complicated and interlinked for a lot of people to understand, maybe even the people who were trading them. I think it's entirely possible that things just got too complex and no one knew what anything was worth anymore.

Obfuscation can be a great source of wealth.

cantdog said:

There are consulting roles, administering this money being doled out, and the same motherfuckers who lost everyone the money in the first place are lined up for those.

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That's the beauty of it! Instead of a bail-out, we could call it Jobs Creation in the Financial Sector.

There will need to be a massive bureaucracy to administer the funds. To find enough qualified people, it will be necessary to hire many whose main qualification is that they've been neck-deep in this mess as it was occurring.

ishtat said:

So not only are you a "don't know," you know you don't know, dont ya know.

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Nobody knows... the trouble I've seen...

Nobody knows... the sorrow...

dr_mabeuse said:

I wear my ignorance on my sleeve, and I keep on getting hung up over these derivatives, which I think are just too complicated and interlinked for a lot of people to understand, maybe even the people who were trading them. I think it's entirely possible that things just got too complex and no one knew what anything was worth anymore.

Obfuscation can be a great source of wealth.

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I don't think Hank Paulson understands the difficulties or complexity ahead of him. He has to strike a price for toxic assets which is generous enough to fix the liquidity issue but not so generous that Wall Street will screw him - impossible.

Meanwhile Congress will insist on the most intrusive oversite imaginable by themselve who by their conduct over the past two weeks or the past twenty years depending on what view one takes have shown themselves to be both technically and ethically, utterly 'unfit for purpose.'

Buffett and all the great investors share one characteristic. If they don't understand they don't get involved. Buffett and you Doc have the same 'don't know " gene. He uses it to make money, you it appears use it to not lose money.

I worked in finance for fifteen years or so and did ok enogh to retire comfortably whilst still young. Our business involved the taking on of certain aspects of our clients risks and managing them for profit. In my last couple of years as CEO I came under a lot of pressure to sell a product which brought the financial risk on board but allowed the management of it to be ceded back to the client through a complex contract.

A great idea which 'saved' operational costs and had certain tax advantages. It was implemented after I left.

However, the law of unintended consequences came into play (doesn't it always?). A number of clients experienced a difficult trading conditions. It was just so easy to understate their liabilities under the contracts just a fraction (and thus maintain profit).

They did that and as a consequence underpriced their own product - the slow spiral had started.

After some 5 years an audit of these contracts revealed very substantial under funding of the liabilities of the early contracts and consequent underpricing of the more recent ones.

I and two others were asked back to sort out the problem. Raised additional capital (difficult and expensive) Raised prices about 55%(which didn't cause a flight of business as our competitors promptly followed us) Brought the management of our product back in house. Then sold the business. Took about 14 months.

Moral of story Don't complicate your business for marginal apparent gains. Keep it simple as possible. The hole we had to deal with was about $100million , small by the standards we have been discussing, but the principle is the same . Complexity kills.

trysail said:

The combination of people believing that residential real estate prices would never fall along with Wall Street's eagerness to accommodate that belief has produced a colossal mess.

Those of us who were taught by our parents that debt kills are going to end up footing the bill for the education of those who weren't.



I (mildly) disagree with you, ishtat. I think Paulson knows exactly what he's getting into. Take a look at the Charlie Rose interview of Warren Buffett (I posted a link earlier in this thread). Paulson understands perfectly well that he has to take a pound of flesh out of anyone seeking to liquidate what have heretofore been unmarketable (due to illiquidity) assets. Buffett thinks the government will ultimately make some dough out of it because it has the ability to hold the assets indefinitely. I suspect the banks have already written down the assets below their "intrinsic values." Don't forget that the accounting books of every federally-chartered bank in the country are examined by the Federal Reserve. I promise you that for the past year, the bank examiners have been looking at bank valuations of loans and securities like hawks. This process will allow the banks to deleverage, re-liquify and, eventually, rebuild the banking industry's confidence in its own solvency.

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I hope you are right about Paulson.

One small technicality amuses me. These toxic mortgages will of course be assets to the government and I understand that they will be held 'off balance sheet'
I agree with you that they will eventually acquire real value and wonder (though not much ) how they will then be treated and who will take the credit!

TRYSAIL

It seems to me that the government dropped the ball with regards to scrutinizing Wall Street and the banks, so what makes anyone confident they'll do a better job of it now?

When I worked for state government the law was pretty clear that investigators had the authority to review patient medical files in hospitals and MD offices WITHOUT PATIENT CONSENT. Well, most of the time medical records personnel told us to go fuck ourselves, and we'd have to get a court order. But everyone knew the law. The resistance was generally a ploy to conceal malpractice until the file was sanitized or altered. Remember the Paul Newman movie where the hospital concealed a fuck-up by altering a medical record? Its common.

I'm betting the new-improved federal scrutiny will be business as usual. There's too much money involved.

A small excerpt from Charlie Rose's interview of Warren Buffett (10/1/08):

Warren Buffett:
Well, they need plenty of money and they really need plenty of flexibility to carry out this plan. They also need in my view to very much tie it to market prices. I have said, Charlie, that the 700 billion, if they buy mortgage-related securities or mortgages themselves at current market prices, they’re going to make money over time because the United States government has staying power and it has a low cost of borrowing. And if I could take one percent of that 700 billion pot and take the gain or loss from it and be their partner, and they would buy the stuff at market, I'd make a lot of money. It’s -- I mean you have hedge funds and people like that buying these assets to yield 15 or 20 percent, I mean, that’s the buyer for these people that are trying to unload them. The U.S. Treasury has got borrowing costs like nobody else has. They can borrow basically unlimited amounts. They can stay there for years and years. These assets will be worth more money over time. So when Merrill Lynch sells a bunch of mortgage-related assets at 22 cents on the dollar like they did a month or so ago, the buyer goes -- is going to make money, and he’s going to make a lot more money if it happens to be an institution like the U.S. government which has very, very cheap borrowing costs.

Charlie Rose:
So you are saying to those taxpayers who are worried about what’s going to happen to the $700 billion, chances are good that when these securities are purchased and sold, you’ll get a lot of your money back.

Warren Buffett:
I think [inaudible].

Charlie Rose:
Or all of your money back, and maybe something else [spelled phonetically].

Warren Buffett:
I would bet on it. I mean, if I got a chance to take one percent of the deal either way, I would make that bet. When Berkshire Hathaway laid out three billion dollars for GE today, we didn’t spend it, we invested it. When the Federal government buys the mortgages, they’re not spending it, they’re investing it. Now, they’re investing it in distress type assets but they’re buying them at distress prices if they buy them at market. It’s the kind of stuff I love to do. I just don’t have 700 billion. Maybe we could go in it together.

TRYSAIL

Peggy Noonan has a great article in the paper today. You might want to read it.

She says that Washington is in the grips of weird people who never experience the consequences of their rules for the rest of us. They dont wait in lines. They arent inconvenienced with cavity searches at the airport. Their loans are approved. Their kids get in the best schools with bad grades or no grades.

My daughter manages a law office. She told me about an event they learned about. A local collection agency forced an 87 year old woman to be arrested and brought to court in shackles because she ignored a subpeona.

Fuck Warren Buffet.

https://personal.vanguard.com/us/Va...nd_Views/news_ALL_mainstreet_10022008_ALL.jsp

Why Wall Street's problem is also Main Street's

A year ago, a "credit crunch" seemed to be a Wall Street problem, affecting a small group of investment banks and hedge funds.

In recent weeks, however, the credit crunch has hit Main Street, putting pressure on the routine lending and borrowing that keep the wheels of commerce turning.

With capital now flowing around the world 24/7, businesses, individuals, and even governments depend on loans ranging from overnight IOUs to those maturing in one week, one month, one year, and longer, including:

*Consumer loans (think car, college, mortgage, or home-improvement loans).

*Government borrowing (loans to municipal or state governments to build roads or schools or to meet cash needs until tax receipts are collected).

*Business loans (lines of credit to produce goods, buy inventories for stores, serve clients, construct buildings, or meet payrolls).


The credit crunch that began a year ago has reached a critical turning point. In recent weeks, some large financial institutions have declared bankruptcy or begun to wind down operations, while remaining banks and financial-services providers have cut back their lending operations. By withholding short-term loans or charging abnormally high interest rates, lenders are crimping the essential flow of cash to the global economy. As the fuel line gets pinched, the engine of global commerce is sputtering.

What caused this mess? It was triggered in large part by the recent decline of U.S. housing prices—the first time that's happened on a nationwide scale since the 1930s. Much of the short-term credit pumped into the global system has been backed by collateral tied to the value of real estate, and in recent years, financial institutions increasingly relied on new, complex mortgage-backed securities to back their borrowing and lending activities.

Meanwhile, businesses and consumers alike were tempted to load up on debt, by low interest rates and rising prices in the stock and housing markets.

But when housing prices reversed, overextended homeowners defaulted in rising numbers, causing the value of mortgage-backed securities to collapse and the complex market for trading them to disappear. Some large U.S. and European banks have gone out of business or been acquired by other institutions, and surviving lenders—fearful their loans won't be repaid—have been spooked into withholding fresh loans until the real estate market stabilizes and the problematic collateral can be valued with some confidence.

Result: A classic credit crisis as lenders hoard their cash.

How this looks on Main Street
"If it doesn't get resolved, there are many ways this credit crunch will affect local economies," said Joseph H. Davis, Ph.D., Vanguard's chief economist.

"Local businesses will have difficulty making payroll or extending credit to their customers. Local municipalities will find that they can't acquire funding for their usual activities unless they pay unusually high interest rates. And consumers will find that if they can get a loan at all, they'll pay much higher rates."

On a larger scale, giant companies that employ tens of thousands of workers are already finding that shrinking access to capital is hindering their ability to finance their operations.

"All these cumulative effects could dramatically slow spending and cause a jump in unemployment," said Dr. Davis.

An attempt to resolve the crisis
To resolve the crisis, federal officials recently announced a series of dramatic moves. Most prominently, the U.S. Treasury has proposed setting up a government-run $700 billion program to buy distressed assets—including hard-to-value mortgage-backed securities—so they can be sold later, when the real estate market stabilizes and starts to recover.

If approved by Congress, the program would allow the U.S. Treasury to buy problem securities from troubled financial institutions so bank balance sheets can be cleaned up, confidence can be restored in the credit markets, and normal lending to consumers and businesses can resume.

"As proposed, this rescue plan would allow the U.S. Treasury to buy these securities at a significant discount from the initial loan value, or at least establish a value for them that could generate interest from other buyers," said Kenneth Volpert, a principal who oversees Vanguard's taxable bond funds.

"This plan shouldn't be called a bailout because the money is not simply spent and consumed. The money will be used to buy real assets.

"The risk of not doing anything is much higher. Without intervention of some sort, banks will stop lending, consumers won't have access to credit, and companies won't be able to expand. In fact, they may have to shrink. The cost to the economy could be many times more than $700 billion."

Meanwhile, investors have been nervously watching the gyrations in the stock and bond markets.

"Market pessimism has been rising all year, and right now it's acute and pervasive," said Mr. Davis. "At some point, negative sentiment will peak. We don't know if we're at that point yet. But the bar has been lowered, so to speak, on the economy's performance over the next few months. The damage that's been done to the global economy is exactly why the U.S. Treasury and the Federal Reserve have put together such an unprecedented response.

"But eventually, expectations will change as we work through this crisis and get a better picture of where the economy is going," added Mr. Davis. "And based on history, when expectations turn around, so do the markets."

In the meantime, the heightened sense of uncertainty suggests that keeping a balance among the asset classes and maintaining broad diversification within each one remains the prudent approach for long-term investors.

Here's What You Need to Know About the Financial-Rescue Plan

By Matthew Benjamin

Oct. 4 (Bloomberg) -- Legislation that the U.S. Congress passed yesterday to stabilize financial markets would give the Treasury almost complete discretion to buy $700 billion of mortgage-backed securities and other troubled assets obstructing lending.

To protect taxpayers and keep Wall Street executives from benefiting, provisions were added that make it easier for the government to profit from the plan or recoup losses, limit executive compensation at participating companies, and establish oversight of the plan.

Following are some questions taxpayers might have about the plan and answers to them:

Will the program keep the U.S. out of recession?

Many economists think a recession is likely later this year with or without the bill. ``We're going into a downturn now,'' said Mark Gertler, a New York University economist who has collaborated on research with Fed chief Ben S. Bernanke. ``The hope is that the bailout package will moderate the recession.''

Is this a bailout?

Bailouts usually refer to government cash infusions into individual companies. The plan passed yesterday is broad-based, and lawmakers expect many companies to participate. Like a bailout, however, the government may end up with equity stakes in private companies in return for its money.

Why was it necessary for Congress to act so quickly?

Banks basically stopped lending to each other two weeks ago, as shown by a spike in inter-bank lending rates. If that continues, the supply of credit to families and businesses may be choked off, sending the economy into a tailspin. In addition, Congress is set to adjourn, and the presidential election is five weeks away.

Will the plan work?

Many economists think it will help avert an even worse crisis in financial markets and perhaps ameliorate the economic downturn.

``It's a $700 billion band-aid, but band-aids can make you feel better and can hold things together for a while,'' said Simon Johnson, former chief economist at the International Monetary Fund and now a senior fellow at the Peterson Institute for International Economics. By paying better-than-market value for toxic assets held by banks, the government could relieve a crisis of confidence in the financial system, he said.

How long will it be in place?

The authority to purchase troubled assets expires on Dec. 31, 2009, but the Treasury secretary could ask Congress to extend it until late-2010.

How will it be funded?

The Treasury will fund the program by borrowing money. The legislation will increase the government's debt limit to more than $11.3 trillion from $10.6 trillion now, giving the Treasury the ability to borrow enough to fund it.

How will it affect my taxes?

That depends on what the next president does. The initial borrowing of funds for the program will add some $2,300 in government debt for every American. Yet the Treasury will get assets for its money, many of which may increase in value as the housing market and economy improve.

``Much of the $700 billion is expected to be repaid, and there could even be a profit made by taxpayers,'' said Alex Brill, an economic consultant at Washington law firm Buchanan Ingersoll & Rooney and a former policy director for the House Ways and Means Committee.

What kind of assets can the Treasury buy?

Mortgage-related securities are the primary target, ranging from simple mortgages to complex instruments, called collateralized debt obligations, which are bonds backed by pools of mortgages. The bill gives the Treasury secretary the ability to buy, hold and sell ``troubled assets'' of any kind. That could include auto and student loans.

Who owns these assets now?

Primarily banks, ranging from Wall Street investment firms to regional banks to small community thrifts.

Is the program voluntary?

Completely. No company will be forced to participate.

How will the insurance provision work?

As an alternative to purchasing troubled assets, the bill directs the Treasury to create an insurance program to guarantee assets and collect premiums from financial institutions to fund it.

Can foreign firms participate in the rescue plan?

Yes. The Treasury can purchase troubled assets from foreign- based institutions.

How will the government make sure it gets these assets at good prices?

The Treasury and the sellers of assets will negotiate the prices paid. Bernanke told lawmakers last month that the Treasury would likely make its purchases at prices above their current market, or ``fire-sale'' values, while still seeking some haircuts from face value to shield taxpayers. In addition to straight purchases, the Treasury may use auctions and reverse auctions to set prices.

Will taxpayers lose or make money on this deal?

The assets the Treasury purchases could increase in value, allowing the government to sell them later at a profit. In addition, in return for buying the impaired investments, the Treasury will receive warrants, or contracts allowing it to purchase shares in participating companies at a preset price. If those companies' stocks rise, taxpayers could benefit.

The non-partisan Congressional Budget Office estimated the net cost of the plan will be ``substantially less than $700 billion but is more likely than not to be greater than zero.''

If, in five years, taxpayers have lost money, the president will have to submit legislation -- most likely some kind of fee on financial institutions -- to recoup losses.

What happens to shareholders of the participating banks?

They'll benefit immediately if the plan succeeds in preventing sell-offs of bank stocks. In the longer term, if the warrants the Treasury receives are converted to equity, shareholders' stakes will be diluted.

How will the rescue affect executive salaries on Wall Street?

Companies that sell troubled assets to the Treasury won't be able to pay golden-parachute severances while participating in the program.

What will the program do for people in danger of defaulting on a mortgage?

The bill contains vague language encouraging the Treasury to implement plans to help endangered homeowners. Many mortgages, through the securitization process, were broken up into pieces and sold off, making it difficult for lenders to alter them so homeowners can afford rising payments.

``This bill does little to remove the existing obstacles that have made it all but impossible over the past year for the housing industry to help enough people avert foreclosure,'' said Kathleen Day, a spokeswoman for the Center for Responsible Lending in Washington.

How and when will we know if it's working?

The immediate goal is to unfreeze credit markets and restore confidence. A drop in inter-bank lending rates and a rise in the stock market, might indicate the legislation is having a positive short-term effect.

Who will monitor how the money is spent?

The Treasury must consult with the Federal Reserve, Federal Deposit Insurance Corp. and other agencies. There will also be an oversight board consisting of the Fed chairman, Treasury secretary, chairman of the Securities and Exchange Commission and other officials. Treasury Secretary Henry Paulson must submit a report to Congress after each additional $50 billion is spent.

The bill also creates an inspector general, appointed by the president, to oversee the program, and a congressional oversight panel.

``It will be closely watched, but it's a tremendous amount of money, so it ought to be,'' said Doug Elmendorf, a former economist at the Fed and Treasury.

Okay. I'm finally going on record here to answer the original question: Will the bail-out work?

My guess: No.

I think bankers and the financial people are too conservative and cautious to risk lending on the basis of this bail-out plan. I don't think anyone really understands how it's going to work, and until they see it in action -- which will probably take a good 3-4 months -- they won't trust it, and by that time the damage will be done.

I think we're in for a deep, deep, recession.

DOC

They know what sort of monster is coming down the road; so they intend to hold fast to the bailout money and pray to Jesus they arent devoured. Lotsa smarties in the banking business see the handwriting on the wall, and theyre young enough to expect long lives after the storm. They'll need that money.

European markets aren't happy today, either.

Had a comment on my blog from a guy who pointed out the growing concern over deflation.

Coupled with a headline in the morning paper about the retraction of consumer spending, this produced a bit of a V-8 head slap moment.


It is almost certain that consumer spending for the third quarter will show the first decline in nearly two decades. Many economists predict that when the overall numbers are analysed we may actually see a retraction in the overall size of the economy.

The bottom line if that plays out is that things will get worse before they get better.

The DOW dropped +800

On the good side, bundled with the pork was the Mental Health Parity bill.

It has finally been passed, years after Paul Wellstone's untimely demise.

It's good for who?

JAMESBJOHNSON said:

It's good for who?

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Ummm... people who have a "mental illness", people who may someday have one, and their families and employers?