http://robertreich.blogspot.com/2008/09/coming-bailout-of-all-bailouts-bill.html
If you think the Bailout of All Bailouts (whose details will be worked out over the coming week) won't saddle American taxpayers with billions, if not trillions, of risky obligations, you don't know politics -- especially in an election year when members of Congress are eager to get home to campaign; when the incumbent lame-duck president (who was he?) has all but vanished, leaving his hapless Treasury Secretary, a former investment banker, to take the lead and the heat; when voters are in high anxiety over the economy and Wall Street is melting down; when the executives of every financial powerhouse in America have staked lots of money on campaigns in both parties and have indundated Washington with lobbyists.
In other words, watch your wallets. The tab here could be very high. If everything goes extremely well, markets move upward, and the risky loans become far less risky, it's possible that taxpayers (that is, the Treasury) might actually make money. But if the bottom falls out, American taxpayers could be on the hook for trillions of dollars. What then? The federal debt soars. What then? Interest rates go out of sight. What then? Foreigners lend us less money. What then? We're cooked.
Some Democrats will try to make the best of the emerging Bailout of All Bailouts Bill, seeking to tack a stimulus package on it. In my view, they'd be better advised to hold out for a different approach.
Paulson is right that it makes sense to allow the big banks to wipe their balance sheets clean of as many bad loans as they can identify, and put them into a special agency that then sells them for as much as possible. The agency would bundle or unbundle the risky loans, slice and dice them as needed, with the goal of getting the most for them on world markets by creating a market for them.
But there's no reason taxpayers need to be involved in this.
Whether you call it a reorganization under bankruptcy or just a hellova fire sale, the process should resemble chapter 11 under bankruptcy. Any big financial institution that wants to clear its books can opt in. But the price for opting in is this: Investors in these institutions lose the value of their equity. Executives lose the value of their options, and their pay (and the pay of their directors) is sharply limited. All the money from the fire sale goes to making creditors as whole as possible.
Meanwhile, policymakers work on a new set of regulations to ensure transparency on Wall Street -- governing disclosures, minimum capital requirements, avoidance of conflicts of interest, and better ensurance against stock manipulation -- so that, once the bad debts are off the books, the new numbers can be trusted.
I repeat: This isn't a crisis of solvency or liquidity; it's a crisis of trust.
********************************
Robert,
I agree with your basic argument,but the SnL crisis related to linear assets,not derivatives.
how are these derivatives and derivatives of derivatives and SIVs to be valued and pulled off the books, this crisis in trust is about undervalued derivative exposure, unregulated leverage of 30:1 to 100:1, and a seized credit system. To date with only subprime the 15T financial sector has lost nearly 2T so far, alt-A, SIVs haven't really even hit yet.
I believe the FED is just beginning to appreciate the scope of the problem and quantity of derivatives in play, several times the US and global GDP...
the 0.5T RTC 2.0 fund, seems wholly inadequate and the effort rings of 'electioneering' more than systemic regulation and improvement.
so operation stealth....is to whisk exactly 'what value of these' into a federal 'holding agency/container'? before the the voters can understand and hope and pray....things remain 'contained'.
GL
If you think the Bailout of All Bailouts (whose details will be worked out over the coming week) won't saddle American taxpayers with billions, if not trillions, of risky obligations, you don't know politics -- especially in an election year when members of Congress are eager to get home to campaign; when the incumbent lame-duck president (who was he?) has all but vanished, leaving his hapless Treasury Secretary, a former investment banker, to take the lead and the heat; when voters are in high anxiety over the economy and Wall Street is melting down; when the executives of every financial powerhouse in America have staked lots of money on campaigns in both parties and have indundated Washington with lobbyists.
In other words, watch your wallets. The tab here could be very high. If everything goes extremely well, markets move upward, and the risky loans become far less risky, it's possible that taxpayers (that is, the Treasury) might actually make money. But if the bottom falls out, American taxpayers could be on the hook for trillions of dollars. What then? The federal debt soars. What then? Interest rates go out of sight. What then? Foreigners lend us less money. What then? We're cooked.
Some Democrats will try to make the best of the emerging Bailout of All Bailouts Bill, seeking to tack a stimulus package on it. In my view, they'd be better advised to hold out for a different approach.
Paulson is right that it makes sense to allow the big banks to wipe their balance sheets clean of as many bad loans as they can identify, and put them into a special agency that then sells them for as much as possible. The agency would bundle or unbundle the risky loans, slice and dice them as needed, with the goal of getting the most for them on world markets by creating a market for them.
But there's no reason taxpayers need to be involved in this.
Whether you call it a reorganization under bankruptcy or just a hellova fire sale, the process should resemble chapter 11 under bankruptcy. Any big financial institution that wants to clear its books can opt in. But the price for opting in is this: Investors in these institutions lose the value of their equity. Executives lose the value of their options, and their pay (and the pay of their directors) is sharply limited. All the money from the fire sale goes to making creditors as whole as possible.
Meanwhile, policymakers work on a new set of regulations to ensure transparency on Wall Street -- governing disclosures, minimum capital requirements, avoidance of conflicts of interest, and better ensurance against stock manipulation -- so that, once the bad debts are off the books, the new numbers can be trusted.
I repeat: This isn't a crisis of solvency or liquidity; it's a crisis of trust.
********************************
Robert,
I agree with your basic argument,but the SnL crisis related to linear assets,not derivatives.
how are these derivatives and derivatives of derivatives and SIVs to be valued and pulled off the books, this crisis in trust is about undervalued derivative exposure, unregulated leverage of 30:1 to 100:1, and a seized credit system. To date with only subprime the 15T financial sector has lost nearly 2T so far, alt-A, SIVs haven't really even hit yet.
I believe the FED is just beginning to appreciate the scope of the problem and quantity of derivatives in play, several times the US and global GDP...
the 0.5T RTC 2.0 fund, seems wholly inadequate and the effort rings of 'electioneering' more than systemic regulation and improvement.
so operation stealth....is to whisk exactly 'what value of these' into a federal 'holding agency/container'? before the the voters can understand and hope and pray....things remain 'contained'.
GL
