Remarks From Remarksman

October 14, 2008

Where Are The Handcuffs?

Filed under: Uncategorized — BrianB @ 6:08 pm
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Treasury Secretary Henry Paulson has finally taken a cue from the Europeans and figured out that it might be smarter to buy stock in the ailing banks than to just buy up the toxic paper. It only took him, what, two or three weeks to figure that out?

I am still waiting for the FBI to march tens or hundreds of the bankers and brokers who engaged in deceptive practices down Wall Street in handcuffs, but, not surprisingly, that does not seem to be a priority for Secretary Paulson (ex-CEO of Goldman Sachs) or the Bush Administration. Instead, we have the previous heads of Fannie Mae and Freddie Mac leaving with a combined $9M in severance packages.

A post at The Big Picture, based on Kate Wellings’ work, provides a time-line of quotes from Secretary Paulson clearly showing that he is either totally incompetent, or a compulsive liar. I’m not sure which is worse, but as Kate Wellings says,

In short, any jot of credibility that the Secretary may have had surely cannot withstand this inarguable evidence of aberrant thinking; the inconsistency alone is staggering. These quips run the full gamut from puerile denial to deliberate understatement to bald-faced demagoguery, right on down to yesterday’s call for patience. Suffocated by his unabashed, unprincipled and incessant manure-spreading, I honestly wonder how the heck it is that we are not on the WH lawn – right this instant – pitchforks in hand.

One of NPR’s news pieces this morning was about a coupon-clipping queen. Why wasn’t it about Senate investigations? FBI findings? We’re supposed to stay calm, clip coupons, and wait for Paulson and Bush to sort out a fix?

October 4, 2008

Bailout Blues

Filed under: Uncategorized — BrianB @ 9:03 pm
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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 BradSherman.house.gov.)

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 BradSherman.house.gov), 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.

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