The Bailout: Don't Believe Everything You Hear

After a relatively quick read of the Bailout Legislation, here are a few quick points. Our Congressional Representatives have asserted that they are most interested in protecting the interests of the American Taxpayer. I can only summarize my comments by saying "Don't Believe Everything You Hear."

(1) The Legislation covers purchases of troubled assets assets from any financial institution having significant operations in the United States. Of course, the Secretary of the Treasury can include institutions that are necessary to promote financial market stability; whatever that amorphous term may mean. In addition, there is nothing that precludes a protected institution from buying assets anywhere and turning around and selling them to the Treasury.

(2) A trouble asset is a a residential or commercial mortgage, or securities related to such mortgages. There is no limitation on where the mortgaged property is located. Hello Marbella. In addition, such assets include "any financial instrument" that the Secretary of the Treasury determines necessary "to promote financial stability"; whatever that amorphous term might mean. Oh, and Section 8 of the Legislation precludes review unless the Secretary acts in an arbitrary or capricious manner, or abuses his discretion. Good Luck.

(3) Congress has proclaimed that the maximum exposure is limited to $700 Billion. Not as far as I can tell. The Act limits the purchase of trouble assets to $700 Billion outstanding at any one time. This does not preclude the Treasury from buying $700 Billion, liquidating these assets, and then doing the same thing again. And, ostensibly, again and again. And, potentially, losing money again and again. Keep in mind, when you listen to the parade of proponents, nobody seems to ever acknowledge that asset prices can drop, even if the asset is over-priced. Heaven forbid. It almost un-Patriotic to have such thoughts.

(4) Congress has promised the public it can participate in the success of the program by providing for the ownership of options. As I read this Law, Not Really. According to the Legislation, the Treasury will receive "Contingent" shares in the selling institution. If the Treasury loses money on the resale of assets it owns, it will receive shares equal in amount to 1.25 times the amount of the loss. However, if the government makes any profit on the sale of the assets, the contingent shares will not vest. Yes, there may be some money in the resale; but there is no minimum return target. In fact, the term profit does not seem to cover the cost of interest that will be paid by the government on the debt issued to fund this. I guarantee you Warren Buffett would never agree to these terms.

Do you really believe this Package has you in mind?

Comments

[DuganS1]

The reason the bill didn't pass is because the vast majority of congressmen know very little to absolutely nothing about financial markets and their impact on the economy. These congressmen ----who voted against this bill - either used reasoning that was completely bunk or flawed, don't understand the problem in any way, or were merely concerned they'd lose votes because so many of their constituents who equally don't understand the problem or situation were calling their congressmen's office upset about the bill. People will start to understand if the vote fails, the DOW falls another couple thousand points, and several hundreds of thousands more workers become unemployed and hundreds of small businesses fail as the recession deepens.

[Neil Grossman - Huffpost Blogger]

Lets start with the fact that this package is no where near the right approach to this, assuming something needs to be done. And I do know pleanty about the financial markets and the economy. We can get into a discussion about alternatives later. As to the DOW, or any other financial market, it is irrelevant. Asset prices have been artificially propped up for years. And their reversion to more appropriate value will always occur. Interfere with that process, as has been the case for a while, and the correction becomes more extreme; and, unfortunately, appropriately so. The fundamentals of the economy are horrendous; and the process is occuring as a direct result of years (probably more like decades) of poor monetary, fiscal and economic policy and distortions. And, if you have not studied the issue, take a look at the problems of the benefit/retirement programs.

[ReasonIsMyReligion]

Excellent anaysis of "No Banker Left Behind." Thanks.

Here's another, very easy-to-digest for us laymen:

Why Some Democrats Said No to the Bailout
http://blogs.cqpolitics.com/davidcorn/2008/09/why-some-democrats-said-no-to.html