UPDATE: 09-25-08 PLAYING POLITICS?

Reports are surfacing that certain conservative Republicans are reluctant to vote for the bailout package prompting us to ask, are we seeing another chapter in Republican presidential politics? The prevailing theory is that McCain has suspended his campaign, returning as a Senator to assist in resolving the current financial crisis, whereas Obama seems to be taking his Senatorial duties, shall we say, more lightly. Since McCain can deliver the Republican vote and Obama can't do much of anything, McCain could (theoretically) walk into the first Presidential debate with a significant economic accomplishment under his belt. Whereas, Obama is left as being seen as a impotent member of the crowd and unable to exert real leadership in a time of crisis. Time will tell whether or not this scenario is true, and if true, will come to pass.

Screw the people ...

Barack Obama and the democrat leadership are every bit as interested in playing politics with this issue as the McCain camp. The public be damned: it's all about politics! From Politico.com we can see the memo that Obama issued to the press. It starts out ...

"John McCain sought to change the subject from his out-of-touch response to the economic crisis with a big announcement that he was 'suspending' his campaign. But the only thing McCain really wants suspended is the American people’s disbelief. In fact, he’s been in full campaign mode the entire time." <Source: Politico.com -- read the whole message>

Isn't it nice to know that in the face of a true fiscal emergency, both sides of the aisle would rather let the people down rather than come to some compromise solution? In this case, it makes one actually wonder just how big of an emergency is this bailout and if alternate solutions already exist. Both sides have hardened their stance to the point of behaving like angry little children. Where is the Congressional leadership of Nancy Pelosi and Harry Reid or are they too busy concealing their party's role in this financial debacle?

UPDATE: 09-25-08  FUNDING GAMES -- WHICH ACCOUNT?

Published reports are now circulating that the FDIC may need an additional $150 BILLION from the United States Treasury to supplement its current on hand 42+ BILLION as of June 30, 2008. In addition, there is no mention of the amounts that the Federal Reserve will continue to supply in liquidity injections. Hundreds of Billions have already been injected into the system in the form of loans collateralized by potentially toxic paper. This is also apparently in addition to any money supplied to the automotive manufacturers in separate funding bills. Automtotive manufacturers who may be associated with past subprime mortgage operations (GMAC/DiTech Funding) or the collateralization of auto loan and lease payment streams.

BIG QUESTION: WILL ANY PART OF THIS PROPOSED BAILOUT BE USED TO REPLACE CURRENT FEDERAL RESERVE LENDING?

Already questions are surfacing that places the exact amount of money leaving the Treasury further in doubt. Will it be ONLY $700 BILLION or something much, much larger?

Original Blog Entry ...

In what could only be described as political theatre, President Bush took to the airwaves and cited the dire need for passing his Administration’s bailout bill. Like a democrat, he was heavy on feeling and light on details.

And that seems to be the problem: both President Bush and Congress still continue to engage in political theatre while being light on details. And no one can tell you the consequences on non-action except that the result will be bad for the people. Sorta sounds like the buildup to Iraq: trust us, it's needed, it's necessary, it's cost effective, it will benefit the people and save lives.

According to my understanding, we will be providing an unelected member of the Administration, Treasury Secretary Paulson, with a blank check worth up to 700 BILLION dollars to spend as he, in his infinite wisdom, sees fit – all without the possibility of judicial or agency review or oversight. Considering the Paulson, a creature of Wall Street, and the Federal Reserve, a private entity owned and operated by its member banks, will be completely at liberty to do what they wish, it seems that the entire process is both unconstitutional and possibly illegal under the laws which govern the handling of government funds.

The democrats want to go along with the plan because much of the mess is of their making – with the legislatively-mandated community housing programs and affordable housing initiatives which forced lenders into making subprime loans to those who could least afford it.  So there primary goal is to stir up initial opposition to the plan, demand certain populist changes like curbing CEO pay (after all, they are still socialists at heart) and then grudgingly sign a plan they are crafting in secret.

Yes, in secret! Like the McCain SHAMnesty legislation, all work it taking place behind closed doors and the so-called transparency that Congress is demanding of others is nowhere to be found.

It is likely that there will be a few cosmetic changes relating to CEO pay, the creation of a powerless after-the-fact review board and perhaps a few tweaks here and there. Then will come the loud shrill sound of democrats crying that they were forced to take action by the exigent nature of the financial crisis.

And life will go on …

The democrats and republicans (both now deserve lower case designations) will continue to suck up campaign funds from lobbyists, try to exert spin on which organizations receive the funds and spin the issue to their advantage.

It still remains to be seen if there are any substantive changes to the bill. It is rumored that they will be working behind closed doors throughout the night (at least their staff members will) and vote on it before the week is out. Of course, the president (again with the lower case) will sign the bill into law and we will have just blown $1.2 TRILLION or more dollars down a rat hole.

Will it solve the crisis?

The current proposal solves nothing and it is likely that the modified proposal will do little more than bailout some of the fat cats and result in media happy-talk from the spinmeisters.

Will this money halt the slide of property valuation and stabilize home prices?

Not likely as none of the money is being used to purchase homes, only toxic paper held at artificially high valuations on the books of various and sundry financial institutions.

Property is a function of supply and demand. Now the supply is exaggerated as new homes that were built in boom times sit awaiting buyers. Foreclosures add more inventory to the already burgeoning stock of homes. Unless people are willing to price them to make a reasonable and attractive purchase – and people can get loans to buy these re-priced homes – the inventory will stay high and prices low. 

Will this money make financial institutions sounder?

First, nothing in the bill will change the current accounting standards which allows the parent entities to keep much of the toxic paper off the balance sheet. So it is unknown whether or not purchasing this paper will do little more than provide a wash against losses.

Second, since the government needs to shore up a financial institution’s numbers, it is likely that the purchase of toxic securities will be made at artificially inflated values. Because the institutions themselves are unable to value the toxic paper they hold and their does not seem to be any counterparties willing to purchase the paper, the valuation becomes a crapshoot. A crapshoot controlled by Treasury Secretary Paulson who can do anything he damn pleases without fear of consequences or judicial review. He cannot be held accountable, in a court of law, for any actions he may take.

Is $700 BILLION enough?

Probably not. But the current proposal allows for an outstanding amount of $700 BILLION at any one time. Thus the Treasury Secretary can purchase $700 BILLION dollars worth of toxic waste, sell them off at a sweetheart price of 25% and then have $175 BILLION in cash or equivalents. Then he gets another $700 BILLION and now has $875 BILLION to purchase more toxic waste. There does not appear to be anything in the current proposal that specified that the proceeds of any sale be used in a particular manner – only that the Treasury Secretary can purchase up to $700 BILLION worth of crap at any one time. Too bad they did say, $700 BILLION total! It seems that the government is too chicken to note that more realistic estimates place the capital needs between 1.2 and 2.0 TRILLION dollars before all of the toxic waste is in the government’s pockets.

Sweetheart deals?

There are some who might wonder why I made reference to a sweetheart price of 25%. Most mortgages are not underwater and people continue to make their monthly payments. It doesn’t really matter that the value of their house has declined because they do not intend to sell the property of re-finance their loans. Those that could not afford the house in the first place will still lose their property to foreclosure. Therefore, their may be real value (land plus improvements) underlying some of this paper. Probably why bottom-fishing hedge funds are buying toxic paper at pennies on the dollar.

Some, including the erstwhile Warren Buffett are making huge bets in institutions like Goldman Sachs ($5 BILLION) which will immediately profit from the bailout. To be noted, Buffett negotiated a deal which on terms unavailable to any ordinary citizen – so let him pay increased taxes out of his profits as he wishes ordinary Americans to do out of their impoverished pockets.

How do you unwind the leverage?

When financial institutions borrowed $30,000 based on $1,000 of equity capital and the market for toxic paper cratered, they were left technically insolvent with $9,000 in losses. How one unwinds the leveraged funds to their advantages without negotiating a settlement with the primary lender is beyond me. If some of the proceeds of the government’s purchase of toxic paper  goes to satisfy the loans granted by other financial institutions, it seems to me like everybody taking in everyone else’s laundry. The money goes around in a circle and essentially becomes unavailable for new loans to be made to the public. So much for liquidity. Perhaps Paulson and Company can specify for what purposes the newly acquired money can be used? By requiring a percentage of the newly-created funds to be used for new mortgages and loans, perhaps some degree of public liquidity will be injected to the system. As of this time, no such provision appears in the Paulson proposal.

What about the government-owned GSEs?

Fannie Mae and Freddie Mac each own toxic paper. Will they, now being part of the government, be allowed to participate in the bailout – or will additional funds be used for this purpose? If additional funds are used, wouldn’t this really mean that the government knew the apparent bailout would cost more than $700 BILLION and that they have deliberately and dishonestly misstated the truth?

More questions than answers …

While there are many more questions I could ask, I will wait and see what tomorrow’s proposal brings. Which leaves the single biggest question in my mind: all of this bailout takes study, detailed accounting and time – who will replace Treasury Secretary Paulson in four months when the Bush Administration comes to an end? Perhaps each candidate should announce his choice (and backup choice) for Secretary of Treasury so that we can make an informed choice in November?

Key Players …

There is no doubt that the key players are Ben Bernanke who heads the Federal Reserve and Treasury Secretary Paulson. But shouldn’t two of the players, Representative Barney Frank and Senator Christopher Dodd step aside as chief negotiators as they appear to be complicit in creating the problems which brought us to this point? Let them retain their votes, but kick them off the committees which wreaked this havoc on the American public.

What will Congress do tomorrow?

All I can say is that Congress will bend to the sum of all the pressures being applied by the Administration, the special interests, the media and the wealthy and powerful Wall Street Wizards – let us hope they can withstand the challenge to stand upright in the face of adversity, rather than become bent and crooked as they have so often done in the past. Perhaps they will even consider the American people in their calculations of the future?

-- steve

Quote of the Day: “Senators are like armpits: Everybody has two of them and they stink most of the time.” Paraphrased from an anonymous source.

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