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TechnoratiBailout Plan Won't Be End of Wall Street Bailouts
Sunday night meetings in Washington produce startling announcements: In March, there was the Fed's $30- billion backing of Bear Stearns' bad assets, as it was given to JPMorgan Chase; last week we had Lehman Brothers' declaration of bankruptcy; this week it's Goldman Sachs and Morgan Stanley, changing their status to one equivalent to neighborhood banks, with all the emergency capital perks thrown in.
The shifting tides of Wall Street aren't over, and neither are the government bailouts. If Treasury Secretary Henry Paulson's request for a $700 billion bailout is approved, it will bring the total government tab for saving Wall Street from itself to $1.25 trillion.
But, reading the fine print, that huge chunk of cash is just for one-time purchases. If the government buys $700 billion worth of assets whose value goes to zero, we could be on the hook for another bailout round before you know it.
Paulson considers this latest plan, "decisive action to fundamentally and comprehensively address the root cause of our financial system."
But it does no such thing. That's because his persistent focus on illiquid mortgage assets and the "housing correction" is not the bigger problem. It's merely the catalyst that revealed the systemic rot of overleveraged and reckless activities that define our financial system.
Blaming irresponsible lending and borrowing is a slick way of avoiding the deeper need for regulation. If the entire industry (from small lenders through big trading firms) were more transparent and less leveraged, a correction in housing wouldn't have brought down three major investment banks. It wouldn't have triggered the decision of the remaining two to become commercial banks, to gain more access to desperately needed capital through citizens' deposits and the Fed's emergency window.
That Goldman Sachs and Morgan Stanley positioned their request like a plea for regulation is a joke - it was a plea for money.
Yes, we need stricter lending practices instead of the ones that contributed to 5 million homeowners facing defaults or foreclosures. But we also need to restructure Wall Street - not by creating bigger, less-transparent entities, but by generating smaller ones whose risks are clear, as was done in 1933.
Meanwhile, Democrats in Congress want more constraints on Paulson's bailout package. They cite the need for independent oversight of the fund that will purchase the assets, a cap on executive compensation, and more help for borrowers through mortgage-debt reductions.
What's lacking, even from the Democrats' wish list, are demands to overhaul and re-regulate the entire banking industry, and that all financial institutions quantify their real credit losses - at the moment, only commercial banks report their exposures.
The Commodity Futures Modernization Act of 2000, passed late one December session by former Senate Banking Committee chairman Phil Gramm (R-Texas), deregulated the privately traded credit derivatives and swaps market. These derivatives have dangerously intertwined with mortgage-backed securities, and require the creditworthiness of the financial institutions that trade them to remain stable. (AIG is an example of one that didn't, and we know how that turned out.)
Also, the Gramm-Leach-Bliley Act of 1999 - navigated by Gramm and cheerled by former Treasury Secretary Robert Rubin, who served under President Bill Clinton - repealed those 1933 protections and made it possible for investment banks, insurance companies and commercial banks to merge without requiring greater regulation.
Today's mess is a direct result of these two acts.
To steer this ship, Congress has to bone up on finance - if members don't know what CDOs (collateralized debt obligations) and credit derivatives really are, they can't understand the risk they have incurred on behalf of American taxpayers, and they'll be ill-prepared to evaluate Paulson's plan. And Congress must then regulate credit derivatives and the banking industry.
The goliath Bank of America-Merrill Lynch will take months to decipher. Goldman and Morgan's buying up smaller banking players - which they will - will add to the murkiness. None of this stabilizes the system. Instead, it sets it up as a bigger problem to solve later.
If our representatives in Washington are serious about fixing the problems that Wall Street has caused, they will shoot the roots of deregulation, not just the messenger of subprime-lending malpractice, or the toxic waste manufactured by Wall Street.
Congress also shouldn't let Paulson anywhere near the management of the buyout fund - and frankly, shouldn't feel compelled to approve a $700 billion bailout without strong regulatory protections for American citizens. But that requires a deeper understanding of the complicated mortgage and credit markets than Congress seems to have.
Meanwhile, stay tuned for more bank mergers and instability, punctuated by rest periods where Wall Street inhales government money. Or, I should say, our taxpayer money.
28 Comments so far
Show AllIf you've any access to land, I would suggest that you start growing food. I will not pay one cent to these corporate robber barons. This Jedi shall volunteer, barter, and leave the nation before 1¢ is taken from him and given to the rich bastards. If your taxes go to the banker who is your creditor, is this not double taxation? Refuse to pay all creditors who accept a tax funded bailout. You've already paid them!
The taxpayer is getting in on the ass end of a Ponzi scheme. And just shut up and pay, right now, chop chop! The fat cats sucked all the nourishment out, and now want us to pay for what is in their litter boxes.
If we taxpayers have to pay for the bad investments, that we had no part in making and did not profit from, then at least we should have options for discounts on the good stocks that are still there. All the data about who owns what and who traded what at which price is centrally computerized at SIAC and DTC. The buyers, that's us, should have access to the information before purchasing.
Trickle the payments in. Make payment contingent on disclosure. Do not compound a bad situation by ruining us for generations to come based on another Iraq war false alarm of urgency.
'scuse my language. Joe
I love part of the frist paragraph.... "In March, there was the Fed's $30- billion backing of Bear Stearns' bad assets, as it was given to JPMorgan Chase;"
Looking at the Office of the Comptroller of the Currency Report from September 2007, a year ago.....
Here is the standing of JP Morgan Chase just a year ago, and CitiBank is number 2, and Bank of America is number 3.
September 2007 * The figures below are in millions, basically add six zeros behind the number.
JP Morgan Chase Bank NA
Total Assets: 1,244,049
Total Derivatives: 91,734,451 thats right folks! 91.7 Trillion dollars or should I say leveraged 74:1.
Total Futures (Exch TR): 1,460,872
Total Options (Exch TR): 2,908,687
Total Forwards (OTC): 5,499,315
Total Swaps (OTC): 61,527,018
Total Options (OTC): 12,560,286
Total Credit Derivatives: 7,778,273
Spot FX: 295,174
Coffeelover,,,,,,,, you aint seen nothing yet!
700 trillion $ will only stop the bleeding for awhile. This gives the people robbing the banks from the inside, time to escape. When they say bailout they mean THEIR golden parachute bailouts! You watch, what scares the hell out of the wealthy elite on Wall Street is the next crisis which if they do not escape in time could wipe them out. I am talking about the tremendous credit card debt that makes the mortgage crisis look like small potatoes. If the economy tanks, millions of Americans will walk away from their credit card debt and that will completely break Wall street and the banks. That is why they are in panic mode.
Indeed, this has the odor of a classic pump-and-dump boiler room operation in the heart of the people's treasury: to pump share prices so the smart money can get out. Any sheep left in this open market should be ready to get the flock out on any near term bounce. But timing is critical. As you note about credit card debt, retail, including automakers, are close to free-fall with an avalanche of job losses and a cascading collapse of stock prices.
The Democratic Party is a one-trick dog, about to do its most accomplished feat: the roll-over. Positive confirmation came when Warren Buffet, who fully backs this free market protection, announced a multi-billion dollar stake in Goldman Sachs, Sec Paulson’s former company and the source of his $700 million net worth. Watch Buffet (if you can) and sell when he sells.
Make book on it: the "invisible" hand of the market is wielding its rubber stamp. Listen to Schumer: "We must look forward, not backward...It’s not fair, it’s not right, but that’s the world we live in,” he said. He added, “I want to assure the markets, we will not Christmas tree the bill. We will act and act soon.” http://www.wsws.org/articles/2008/sep2008/bail-s24.shtml
The hostile takeover of the American government is a fait accompli. What are we going to do about it?
There’s no excuse for allowing the collapse of the U.S. economy to happen.
No amnesty, no pardons.
Pursue the Bush administration beyond January 20 until they are brought to justice.
FREE AMERICA
REVOLUTIONARY (DIRECT) DEMOCRACY
It's a mess because we do not live in a democracy but rather in a country entirely run by the super rich and their 2 groups of lackey politicians.
Sioux Rose
RAY DEL CAMINO: You take something complex and make it understandable. I wish you could get a "letter to the editor" published in a large circulation newspaper to wake up THE flock! Thanks for posting.
Forget deregulation. Teaching history might have helped. Does anyone remember the "South Seas Bubble"? I thought not. There is not much new under the sun; just same greed, different package.
I am sure many at CD know of the South Seas Bubble. What always amazed me was that Isaac Newton, one of the greatest geniuses in human history, who not only invented modern physics but whose brilliant proofs can be found throughout various fields of mathematics, was one of the victims. That should be warning to anyone about the potential dangers of investment schemes.
If you think that the mortgage crisis is the final chapter of this nightmare you need to look at the other leg propping up this financial house of cards which is consumer debt. The latest statistics show that US consumers are in for no less than $2.43 trillion which could falter once the economy goes into recession. Guess who holds the bulk of these consumer debt - the commercial banks who are trying to pick up the carcasses from the investment banks.
UPDATE: In the last three hours since I posted this comment the following showed up as a news item.
http://www.freep.com/apps/pbcs.dll/article?AID=/20080923/BUSINESS07/80923058/1009/NEWS07
Impressive so many people recognize that this is a symptom of an underlying deregulation problem. It's so encouraging to see people discuss how Ronald Reagan's administration ushered in an era of corruption, corporatism, and dismissal of regulatory safeguards.
1. When Reagan was in office, I missed Richard Nixon.
2. Now that Bush II is in office, I miss Ronald Reagan.
Man, how sad is that?
If the Dutch government had bailed out tulip speculators, we'd all be paying millions for tulip bulbs now.
Or, maybe not. Maybe the speculation bubble can't be perpetually held up by the government. Maybe trying to force taxpayers to pay off gamblers is a really bad idea. Maybe the bubble will just burst later, with infinitely more people losing money.
Maybe the Democrats and Republicans in Congress aren't thinking of the best interests of the American people.
Cue the Obama chorus to start singing about change. Boy, once Obama the bailout supporter gets into office, his Treasury Secretary Paulson will really make some changes for the better in this country.
Nomi Prins for chairperson of the Presidential Council of Economic Advisors, Dr. Michael Hudson for Secretary of Treasury--or vice-versa.
Poet
What we really need is to nationalize the banking industry. But that isn't going to fly.
If going from world colossus to bankrupt beggar in two decades is not enough proof, I do not know what would convince US citizens that their economic/banking system is fundamentally flawed.
And I am delighted to learn we will now include foreign banks in the bailout.The flaw is in the regulations that have been removed under every President starting with Reagan.
an online letter to stop the bailout
http://ga3.org/campaign/congress_no_blank_check/xixdkn34p7iewd3b?qp_source=20080922%5fnoblankchck
The Democratic Party, so far, has been a one-trick dog that only obeys "roll-over!" when Republicans bark. And it's a very old dog no longer trainable.
There's also some evidence that the Democratic Party is the big tent training ground for the Republican Party. Those who are corrupt enough (Reagan, Phil Gramm, Norm Coleman, Joe Liebermann, the Dixiecrats, etc.) if they can demonstrate how spineless they are, get a chance to graduate into the Rethuglican Party. Some Democrats stay behind to manage the game (Pelosi, Clintons, etc.). But it's clear that the Democratic Party is where progressive ideas go to die. In the Republican Party, they're stillborn.
Good imagery.
Joe
No. They are aborted.
Although Bill may not know the difference between a cdo and a credit derivative, he knowws a pyramid scheme when he sees one. Wall Street has become expert at creating and repackaging pyramid schemes with different names, and encouraging investors to buy and hold rather than gettting rid of the hot potato.
I couldn't tell you the difference between a collateralized debt obligation and a credit derivative if they walked into the room together unnanounced and holding hands.
But neither would I immediately pull out my wallet, and offer them money to leave.
Bill from Saginaw
Bill - I agree with you. But the Congress is all too eager to pull out their wallets and give OUR money away. That's the problem!
The concept of financial industry deregulation consequeneces is easy to understand. Unfortunately, most of the US electorate is either incapable or unwilling to understand it.
At the time Ronny Raygun started the financial industry deregulation frenzy a quarter century ago, there had been no financial crisis in the US since the start of FDR's new Deal 50 years earlier. During the past twenty one years we have seen a series of financial crisis, all of them the result of deregulation. The response to each crisis has been to enact additional deregulation, further reduce corporate taxes and provide taxpayer-financed bailouts. These measures assured that subsequent crisis would be more severe and require ever larger taxpayer-financed bailouts. Add to this, Raygun's revised methods of calculating the rate of inflation (for the purpose of understating the rate)and you have an entire economy that has been manipulated from the ground up for well over 20 years.
This trillion dollar bailout will 1) further enrich the Wall Street pirates that engineered the problems we now face, and 2) further weaken the US dollar and the US economy to the extent that most of the people alive today will not live to see a recovery.
Also during that time, mortgage rates climbed to 12% for a 'normal' 20-30 year loan. This was probably the highest mortgage rates have ever been. The current Fed rate is 2%, but mortgage companies are 'gouging' at least 4% on top plus points etc. Only to protect a previous rate. If Congress did it's job to 'coin' money they could do it for no interest or 2% directly to the homebuyer and guarantee the loan. But there is no political will to do the right thing, if there ever was. One thing is for certain, there is no interest on the part of the government to protect the people. If there was traditional pensions and alternatives would not have been allowed to be stripped by the corporations those people worked for. And please, no lectures on how corporations dumped it on the government insurance structure, sorry can't remember it's name.
"Congress also shouldn't let Paulson anywhere near the management of the buyout fund - and frankly, shouldn't feel compelled to approve a $700 billion bailout without strong regulatory protections for American citizens. But that requires a deeper understanding of the complicated mortgage and credit markets than Congress seems to have."
DUH!
This is B.S. All members of Congress are millionaires, the last I heard. Their husbands or wives manipulate large investments in all aspects of the economy. Our crummy little IRAs' and 401ks' we sweated to add to are meaningless. Oh, your sweat equity in your home for the last 15 years or more? That's your problem, too.
Oversights? Taxpayer guarantees? Homeowner help?
Tell me when to stop laughing. It hurts deep.