Remarks From Remarksman

October 4, 2008

Bailout Blues

Filed under: Uncategorized — BrianB @ 9:03 pm
Tags: , , , , , ,

It’s just politics in the good ol’ U.S. of A.: If you add enough pork to a stupid bill, you can get it passed.

That is pretty much what led to the passage of the big bailout bill yesterday. It makes no sense to add a bunch of “un-funded” tax breaks to a bill that already massively increases the national debt, but sense often does not figure into how our congress operates. Here is a quote from an opinion piece written by James Grant that will show up in tomorrow’s Washington Post (Hat tip: The Big Picture):

Low interest rates, easy money and malleable accounting rules are what plunged Wall Street into crisis. Yet it is low interest rates, easy money and malleable accounting rules that top the list of federal fixes. The unifying theme of the new bailout bill, all 451 pages of it, is the hair of the dog that bit you.

The unblinkable fact is that Americans own too much house. We overpaid and overborrowed, and many of us are “upside down,” as the car dealers say. What to do? Recognize the losses and write them off. What not to do? Inflate the currency and debase accounting standards.

But inflation and debasement are the very policies being put in place. The Federal Reserve, not waiting for Congress, embarked last month on a radical program of money-printing. Reserve Bank credit — the raw material of bank lending — is growing at the year-over-year rate of 61 percent.

Credit creation is the Fed’s signature crisis-management policy: Let a bubble inflate, then watch it burst; clean up with lots of dollar bills.

So, we’re stuck with a stupid plan and a bunch of pork. What can we do?

Representative Brad Sherman (D-Calif.) was one of those who voted no. He has issued a statement calling for pressure on Congress and the media to keep an eye on the money (Hat tip: MojoBlog):

Today, Congress approved the $700 billion Wall Street Bailout Bill. Under the Bill, hundreds of billions of dollars will be used to buy toxic assets currently in safes in London, Shanghai, and Riyadh, Saudi Arabia. Bailed out Wall Street firms will use their bail out money to pay million dollars a month salaries, and to even increase them to two million dollars a month. (For details, see paper at

Our economy will not do well in the months to come, and dropping $700 billion on Wall Street is not going to make things much better. But now Wall Street will use the same fear mongering tactics which were used to pass the Bill, in order to justify the bill.

In order to pass the Bill, Wall Street declared that unless they received $700 billion in unmarked bills, the Dow would drop by 4,000 points and blood would flow in the streets. The passage of the Bill will have little positive economic effect, and the fall and winter will be bad times for our economy. But in the coming weeks, Wall Street will justify the Bill by saying that we averted those very same calamities they had predicted during their successful effort to create panic, and pass the Bill.

The worst abuses of the Bill can be minimized if Congress, and especially the press, begins an unprecedented level of ferocious oversight:

  • We have to make sure that Paulson spends the money and the orderly rate of less than $50 billion month (as he has promised), not at a frantic pace that spends it all by January 20th, 2009.
  • We have to make sure that Paulson treats all financial entities fairly, whether they be firms he likes, or firms he doesn’t like. (It will take incredible investigative journalism to see whether the executives of any bailed-out firms are making secret contributions to Section 527 organizations, which are responsible for a big chunk of today’s political advertising).
  • When a firm receives a billion dollars in bail-out cash, we must report on which of its executives are receiving that cash in the form of salaries in excess of $1 million a year. (The bill allows unlimited salaries to be paid by bailed-out firms, and does not contain a provision preventing the bail-out cash from being used to pay those salaries.)
  • Each time a U.S.-headquartered entity sells billions of toxic assets to the Treasury, we must ask whether that U.S. entity is just acting as an intermediary. We must ask whether those toxic assets were in foreign safes on September 20th, 2008. We must be aware of the China two-step (described in a paper at, in which a foreign investor who made bad business decisions can sell toxic assets to a U.S. entity on Monday, and Paulson can buy those toxic assets with taxpayer dollars on Tuesday.

No one will ever be able to prove that the Bailout Bill helped or hurt our economy during the coming fall and winter. Only two things are certain: the bill will provide hundreds of billions of dollars to investors who made bad decisions and Wall Street executives; and our children and grandchildren will now face a national debt that is hundreds of billions of dollars higher.

For another interesting tidbit on how we got into this mess, check out this post at The Big Picture. Extract:

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

Guess who was the CEO of Goldman Sachs, one of the five banks making this request: Henry Paulson. I think that makes him particularly unqualified to repair the damage.

Update (Oct. 5)

Barry Ritholtz provides a succinct explanation of the financial crisis, then analyzes Fannie Mae’s (and Freddie Mac’s) role in the mess. Excellent reading.



  1. Nice writing style. Looking forward to reading more from you.

    Chris Moran

    Comment by Chris Moran — October 4, 2008 @ 9:06 pm | Reply

  2. Low rates, per se, did not get us into the trouble we are in now. Greed and fraud combined to do this.
    When rates bottomed out at 1% on the 1 year t-bill, a normal mortgage would still have been about 5% for a 15 yr fixed, 5.5% on a 30. Even an ARM would have had a rate of 3.75%-4%.
    Now, the problem started when people were hooked into a mortgage based on interest-only at a teaser rate of 1%. That could happen at any time, but consider, a $200K 6% fixed mortgage would have a $1200/mo payment. 1% of $200K is $2000. This is $166/mo. People were signing up for huge mortgages having no idea how they would handle the payments after the first adjustment. It was the stories of people who refinanced from the 5% fixed to catch one year of a teaser rate that really got to me.

    Comment by joetaxpayer — October 4, 2008 @ 9:51 pm | Reply

  3. I agree that there some fraction of the people taking out these crazy mortgages did so with greed and fraud as part of their motivations. On the other hand, the fact that “banks” approved of these mortgages points to the “easy money and malleable accounting rules” that come right after low interest rates in James Grant’s piece.

    Comment by BrianB — October 5, 2008 @ 12:15 am | Reply

  4. “Greed and fraud” of the bankers was what I intended to say here.

    Comment by joetaxpayer — October 5, 2008 @ 3:13 am | Reply

  5. Where are the auditor’s reports on all these companies being bailed out? How come no one was warned about their grave financial condition.?How can a company like Bear Stern’s stock be worth $90 on Friday and worthless on Monday?

    Great financial reporting-

    Comment by Sean Liotta — October 5, 2008 @ 5:07 am | Reply

  6. @Joe: Agreed. Re-reading your comment with that in mind gives it a whole new meaning.

    @Sean: No kidding. I really wonder why the FBI and SEC aren’t seizing computers and records left and right up and down Wall St. Then I remember that the CEO’s of these companies probably play golf with Paulson every month.
    Another factor contributing to the rapid loss of valuation of banks is that they have to value their assets using “mark to market” accounting, which means they have to value them at what someone else would actually pay for them. With securities that are thinly (rarely) traded, banks can keep claiming a high value for an asset that has actually significantly depreciated.
    Thus, “Crappy Mortgage Security X,” which sold for $1,000 per share a few months ago, but which had no trades for several months, can suddenly be worth $0.50 per share if there are some trades tomorrow. The bank could keep claiming it as an asset worth $1,000 per share right up until the trade occurs.
    I don’t know if the mortgage-backed securities fell in value that quickly, but if the bank is leveraged 30-to-1 with a huge investment in those securities, they suddenly lose a bunch of their assets if some of the securities lose value quickly and the bank has to sell a bunch of them into a down market in order to un-leverage their holdings.

    Comment by BrianB — October 5, 2008 @ 5:49 am | Reply

  7. I took the pledge – Have you?

    Well the congress has done it.

    As of the morning of the bail out vote in the House of Representatives, polls showed that the American people were 74% against any bail out for the Wall Street fat cats. We wanted a fix from the bottom up and not from the top down. Fix ‘Main Street’ not Wall Street we told them. They didn’t do it.

    However they did agree with the bloated $700 billion the Senate passed for their greedy Wall Street friends with another $150 Billion of Pork. So now our children are on the hook for at least $850 billion and no one can tell us if it will work or will be the last.

    Meanwhile, ‘We The People’ continue to lose our jobs and homes.

    Our elected representatives have chosen to ignore us, ‘We The People’ whom they swore to represent.

    They think we are stupid. They think we don’t have the guts to clean house. They think ‘they know better’ than we on ‘Main Street’ do.


    I have taken the Pledge:

    I, (put your name here), will NOT vote for any incumbent in the upcoming election regardless of party or who the opposition may be. I intend to do my part in ‘throwing the bums out’ in Washington that continue spending my money on those that have wrecked our economy rather than the people who sent them there. This is my solemn pledge.

    Mail this to your Representative and Senators, to all your friends and all news media, both local and national. Email this to all the talking heads on the cable outlets, Lou Dobbs, Bill O’Reilly, Keith Olbermann, Chris Matthews, Alan Colmes, Sean Hannity, Rush Limbaugh and with every blog and talk show host you know of.

    Urge everyone you meet to take the Pledge.

    This the only way we, the American People, will ever take back our own government.

    They keep telling us that the only power we have is the vote. So… For once let’s use it!!!!!

    Believe me… if we turn them all out THERE WILL BE CHANGE!!!!

    Do we have the guts? Do you???

    If not, then you don’t have any right to complain if they continue to screw us over.

    Comment by reallymadvoter — October 5, 2008 @ 6:10 am | Reply

  8. @reallymadvoter: My Senators and Representative have already been informed of how I feel about the bailout. I find it curious that your pledge seems to ignore that some of the incumbents did vote against the bailout, both times – are we supposed to give them the boot, too?
    There is a great quote from Robert Johnson, former chief economist of the Senate Banking Committee, on the Oct. 3 Democracy Now news show:
    ROBERT JOHNSON: I think this bill, five weeks before an election, is illustrating for the American people, when there are two currencies of power – votes and money – that even at this time, when the power of votes is at its cyclical high, meaning just before the election, they are almost laughing at the American people, in the – by the nature and structure of this bill. This is a very sad result.

    Comment by BrianB — October 5, 2008 @ 5:57 pm | Reply

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