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Yes To The Dem Plan, No To The Paulson Plan

I think there is absolutely no doubt that Congress will act in some way to address the credit/mortgage crisis Wall Street now faces. The question is HOW do they act. Matt Yglesias writes about the false presentation of the options that proponents of the Paulson proposal are trying to force upon the country:

1. [D]o absolutely nothing in response to the current situation . . . 2. [W]e do exactly what Hank Paulson proposed over the weekend. . . . [P]roponents of the Paulson Plan have an obligation to either make the case for (2), or else to canvass some alternative ways of doing (1) and explain in clear terms why the Paulson Plan is superior to other alternatives. Merely citing the urgent need for action is a transparent effort to foreclose debate.

That transparent effort failed. The Paulson plan is dead imo. In the NYTimes, David Leonhardt writes:

So are you for the bailout or against it? Many people, I’m guessing, don’t have an immediate answer to the question. They understand that the financial crisis is serious enough to require a big response from the government. But they also hate the idea of rewarding Wall Street for its failures and are wary of yet another assurance from the Bush administration that this step will be the one that contains the crisis.

. . . [Congress'] best shot at success depends on keeping the debate tightly focused on the questions that matter most. There are really only two: What steps are most likely to solve the immediate crisis? And how can the long-term cost to taxpayers be minimized?

Over the last few days, Congress has done a pretty good job of identifying the biggest weaknesses in the Paulson plan, like its vagueness. . . . The first thing to understand is that a bailout plan doesn’t have to cost anywhere close to $700 billion, so long as it’s designed well. . . .

Figuring out how much to pay for the assets is the first problem. The drop in house prices and rise in foreclosures have made it clear that these securities are worth considerably less than banks expected. But there is enormous uncertainty about how much less. . . . Which price is the government going to pay? As Mr. Colander puts it, that’s where the action is.

It clearly shouldn’t pay 75 cents on the dollar, or anything close to it. That would mean the Treasury Department — which, in the end, is really you and me — was assuming nearly all the risk. But it probably can’t pay 25 cents. That might fail to fix the credit markets, because it would do relatively little to improve financial firms’ balance sheets. . . . The most obvious solution is to pay more than 25 cents on the dollar and then demand something in return for the premium — namely, a stake in any firm that participates in the bailout. Congressional Democrats have been pushing for such a provision this week, and it’s one of the most important things they have done.

The government would then be accomplishing three things at once. First, it would take possession of the bad assets now causing a panic on Wall Street. Second, it would inject cash into the financial system and help shore up firms’ balance sheets (which some economists think is actually a bigger problem than the bad assets). And, third, it would go a long way toward minimizing the ultimate cost to taxpayers.

(Emphasis supplied.) Leonhardt is, in essence, endorsing the Dodd/Democratic Plan. While he does not want to talk about mortgage relief for Main Street, that does not mean it can not be a part of the deal. Indeed, to make this work politically, it has to be. And I think it will be.

This is where the fight is now, imo.

By Big Tent Democrat, speaking for me only

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    The American Plan: (5.00 / 3) (#6)
    by pluege on Wed Sep 24, 2008 at 08:05:38 AM EST
    1. Convert all troubled adjustable rate mortgages that home owners can't pay to fixed rate at today's rate and market value of the home.
    2. provide supplemental mortage payments to Americans who can't meet payments based on (1) in return for being co-owner of the house with the individual. If the individual defaults on their part of the mortgage payment, the US gets the house.
    3. re-regulate the financial industry to prevent this from happening again
    4. Wall St gets NOTHING except criminal investigations up the wazoo. Let the schemers and the gamblers go into bankruptcy in good capitalist fashion


    not a bad proposal (5.00 / 1) (#8)
    by Kensdad on Wed Sep 24, 2008 at 08:16:13 AM EST
    anyone supporting a gov't bailout has lost his/her mind.  the gov't needs to protect individuals' savings and conservative investments in money markets and the such (basically a souped-up FDIC)...  other than that, let the free markets do their work of cleansing out the greedy bastards who made this mess.  sure, we should have new regulations to stop this kind of thing from happening again in the future, but let the free markets finish the job of wiping out the irresponsible, incompetent, greedy risk-takers who leveraged "other people's money"...  if the gov't wants to change any laws, then let them go after the ill-gotten (but "legal") gains that these monsters shoved into their own pockets over the last several years...  then, come talk to the taxpayers once the bad actors have been punished...

    Parent
    "and the such" (5.00 / 0) (#18)
    by robrecht on Wed Sep 24, 2008 at 09:00:39 AM EST
    The real difficulty is defining "and the such" in your comment above.  It is presumably more important to save 401k accounts than money market accounts and that cannot be done without some concern for the whole stock and bond markets.  Not a simple answer on this one ... unless of course one is a Republican idealogue like Newt.

    Parent
    I think it would be a huge mistake to provide (5.00 / 1) (#7)
    by Anne on Wed Sep 24, 2008 at 08:15:06 AM EST
    companies with the means or a mechanism to extricate themselves from the trouble they're in without putting conditions on that assistance.

    Sure, buy up these bad loans, but demote or fire or otherwise prevent the management that approved the policies and made the decisions that got them into trouble from being involved going forward.  Clean house.  Require that participating in a buy-back program automatically voids the golden parachute severance packages for anyone who is let go, and requires a new bonus plan for anyone who stays as being contingent on minimizing the costs to the taxpayers.

    Require that some of whatever money is appropriated be dedicated to homeowner relief, with the goal of keeping people in their homes and in their communities, but don't make it a free ride.  Convert as many mortgages as possible to fixed-rate, 30-year terms to reduce the numbers of mortgages that will fail - or have failed - under their current terms.

    Prevent financial institutions from re-selling mortgages for a fixed period of time to avoid the situation where bad risks are just being passed down the line, and the homeowner has no one local to talk to when things go wrong.  One of the best things we ever did was get a mortgage through our local credit union, which does not sell their mortgages; they are committed and connected to the community and actually have an interest in working with the people they lend money to.

    If we got into this mess because there was no accountability, the last thing we should accept is any plan where there is no oversight, or the oversight is just part of a closed loop.

    I wish I could say that I have any confidence in the ability of the Congress to reject the plan as currently proposed; I fear the déjà vu of "the best we could do in the time that we have to do it."  


    "sure, buy up the bad loans"??? (5.00 / 1) (#10)
    by Kensdad on Wed Sep 24, 2008 at 08:20:36 AM EST
    why should we taxpayers, most of us having behaved responsibly, buy up any bad loans?  that's just nuts!  i don't want my tax dollars to buy bad credit card debt, auto loans, student loans, home equity loans, or mortgages!  if people were defrauded, then provisions should be made to make them whole, but other than that, Americans need to grow up!  no bailouts for crooks, bad actors, or irresponsible lenders or borrowers!

    Parent
    It's going to happen - the question is (none / 0) (#14)
    by Anne on Wed Sep 24, 2008 at 08:41:21 AM EST
    whether it can be structured in a way that does not actually reward companies for making loans they knew or had reason to suspect were going to go bad.

    I don't know enough about how all this works, but the companies from which these loans will be "bought" should not be starting with a clean slate - they should still be on the hook for the assistance coming from the taxpayers.

    There is not going to be a perfect and painless way out of this mess, but there needs to be someone advocating for the taxpayer in all of this.  The question you have to ask, I think, is what happens to the economy if there is no money, no liquidity in it, no credit to be had.

    Parent

    Not an option though (none / 0) (#37)
    by Socraticsilence on Wed Sep 24, 2008 at 10:00:57 AM EST
    Look, at this point some buying up pretty much has to occur, it sucks but we really can't let all partis involved fail, what we can do is take a stake and give significantly less than Paulson's asking, while at the same time doing mortaqge relief.

    Parent
    Remind the Republicans of their own Platform ! (none / 0) (#53)
    by vector on Wed Sep 24, 2008 at 10:20:19 AM EST
    The 2008 Republican National Platform - adopted just a few weeks ago - opposes all government bailouts of private companies. Here is the exact quote (from the section "Rebuilding Homeownership"):

    "We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself. We believe in the free market as the best tool to sustained prosperity and opportunity for all."

    Congressional Democrats need to start quoting this at EVERY opportunity.  Embarass the hell out of the GOP'ers whining for hand-outs for their fat cat pals.

    Parent

    All of the people who are in bad loans (none / 0) (#71)
    by hairspray on Wed Sep 24, 2008 at 11:12:47 AM EST
    are not crooks and cheats.  I believe that if we went with the HOLC plan to aid mainstreet first, the other punitive measures could take place after the election.  Stay focused on the toxic loans, but don't foreclose them leaving them to devalue and continue the downward prices. Keep homeowners in the homes and restructure paymentst so they can keep paying.  That will stop the inventory creep. That should help Wall Street indirectly, but it keeps them out of the driver's seat.

    Parent
    I'm not sure it is possible to buy up (5.00 / 1) (#91)
    by Christy1947 on Wed Sep 24, 2008 at 12:03:52 PM EST
    'the bad loans.' The way Wall Street fouled this up, the originators of those loans, Golden West and Countrywide and a lot of scummies, then sold those loans to an investment banker, who put them in pools of mortgages, and sold interests in those pools to investors, including some small towns in Finland and Australia. So that the owners of the mortgages became either the pool, if it was an income stream they sold to investors, or all those far flung investors, if they sold percentages of the mortgage notes themselves to them. It is not clear if these arrangements provided for a servicer who could make decisions on those mortgages, once pooled and the securities secured by them were sold.  All the guilty who hustled everybody to create those mortgages, are out of the deal, and it may be that the investment banks who packaged them up and sold the resulting securities are also out. Leaving teeny little places in Finland and Australia holding the bag and possibly tiny fractions of the notes.

    To buy them back, you have to know who owns them, and there are appearing in foreclosure cases serious problems with determining who owns those notes. And serious constitutional problems relating to laws impairing the obligations of contract in trying reverse whatever it was that was done.

    Parent

    What is the root of the problem? (5.00 / 1) (#12)
    by Jlvngstn on Wed Sep 24, 2008 at 08:32:17 AM EST
    Flat wages and the loss of hundreds of thousands of jobs.  For the first time last night I heard someone address it, David Gergen on CNN.  Cannot remember the exact wording but he did say that the root of the problem holds the solution and that the root was loss of jobs and salary stagnation.

    Any bill that does not address those issues will do very little for the economy.  

    Here is your net out with the bailout sans jobs creation:

    1. Stable market for 30 days.  Proceeding 60, highly volatile market with numerous bankruptcies by retail and auto to start.
    2. Flood of small businesses going bankrupt or out of business (they employ nearly 1/3 of the american workforce)
    3. Credit market slightly freed up slightly with approximately 60 billion made available via credit (a pittance really)
    4. Unemployment at 8 or 9% by the end of the year.
    5. Second round of foreclosures all through 09 increasing at the end of 09 and another liquidity crisis same time next year.

    We have a leg with untreatable gangrene and we are paying a plastic surgeon to remove a corn on that foot.  

    This bailout by Paulson's admission will stabilize the market.  What he is not saying is that the stabilization is temporary and simply does not address the primary root cause of the problem which is wage compression and lack of work.

    Shame on both parties for giving us the BS soundbytes of "CEOS should not get rich in the bailout" instead of addressing the root of the problem.

    Job Loss only ONE piece (5.00 / 1) (#84)
    by pluege on Wed Sep 24, 2008 at 11:41:13 AM EST
    other three pieces:

     1) people getting loans that were unqualified financially to pay the loan back, i.e., ridiculous, deceptive, and predatory lending practices. Sure everyone should know what they're getting into, but that is just not reality. The Lender is even more responsible to make only those loans that people have the wherewithal to pay back.

     2) people leveraging homes to take lines of credit against inflated housing valuations so they could live above their means. Lenders and borrowers both bear responsibility, but the bottom line, lenders should, AND DO know better than to make such high risk loans. Loans should have been pegged to real equity.

     3) adjustable rate mortgages, which are a trap. They are built for speculators, which the great majority of people are not knowledgeable enough about to not get burned. Should be made illegal for a person's primary residence.

    Parent

    yes, i addressed that above (5.00 / 1) (#104)
    by Jlvngstn on Wed Sep 24, 2008 at 12:46:55 PM EST
    from Robert Reich:

    "But will it work? Here's Paulson's and Bernanke's logic, made explicit at the Senate hearing today: There's only a certain amount of bad debt on Wall Street's books, left over from the wild and woolly days of lax mortgage lending. Once removed from the Streets' books, credit will flow again. And once credit flows again, even Main Street can breath a sigh of relief.

    P&B failed to mention that bad debts are growing even among people recently considered good credit risks. At end of August, 6.6 percent of mortgages were at least 30 days past due. That's up from 5.8 percent at end of June. We're also seeing a growing amount of credit card and auto payments past due.

    The culprit isn't just those sub-prime loans. With jobs and wages are dropping across America, many people who had been able to pay their bills no longer can.

    It's no coincidence that states where mortgage delinquencies are highest are also states with the highest rates of job losses. According to the Bureau of Labor Statistics, the official rate of unemployment in California last month was 7.7 percent. That's up from 5.5 percent a year ago. In Florida, unemployment has climbed to 6.5 percent, from 4.1 percent a year ago. No surprise that bad debts are mounting fastest in California and Florida - and elsewhere around the country where jobs are evaporating fastest.

    Note that these are just the official rates. Some 600,000 fewer jobs are listed on the nation's payrolls than were there last year. Millions more Americans are too discouraged even to look for work. And as employers squeeze their payrolls, even people with jobs are putting in fewer hours.

    Bailing out Wall Street's bad debts when millions more Americans can't pay their bills is like bailing out a rowboat springing more leaks while the ocean is rising. Many of the average taxpayers being asked to take on Wall Street's bad loans are the same people whose incomes are dropping, which means they're struggling to pay their debts and potentially creating even more bad loans.

    Congress should drive the hardest deal it can with Wall Street. But Congress also needs to pay direct attention to Main Street. It should extend unemployment insurance, freeze mortgage rates, and pass a stimulus package that generates more jobs.

    Bottom line: Unless Americans on Main Street have more money in their pockets, Wall Street's bad debts will continue to rise -- which means the Bailout of All Bailouts grows even larger, which means taxpayers take on even more risk and cost."


    Parent

    Root of the problem (none / 0) (#15)
    by befuddledvoter on Wed Sep 24, 2008 at 08:45:00 AM EST
    Sopeculative real estate development; huge loans to people who were high risk; glut on the market of real estate so really overdevelopment in short time; inflated real estate market.  I don't think "flat wages" were the root cause of this crisis at all.  

    Parent
    Other factors (none / 0) (#17)
    by Jlvngstn on Wed Sep 24, 2008 at 08:52:08 AM EST
    You are correct that there was predatory lending and falsification by buyers.  I would apply the 80/20 rule there.

    EVery story I read says the same thing, I cannot "afford" my mortgage, with a more than 80% citing loss of job, new job with less wages and spike in the ARM terms.

    Are you saying that the 700,000 jobs lost this year and the anticipated 400,000 more by the end of the year are not the root of the problem?

    Are you implying that if we were to invest 600 billion immediately to job creation that those same homeowners who secure employment would NOT pay their mortgages?

    Riddle me this.  Tell me what happens after the bailout.  Please be specific.

    Parent

    Can't speak for the other poster, but this (none / 0) (#23)
    by tigercourse on Wed Sep 24, 2008 at 09:22:17 AM EST
    problem started when unemployment was lower then it is now. "Mistakes were made". Borrowers made the mistake of taking ARM's that they could not afford once the adjustment was made and lenders made the mistake of offering them to too many people who could not afford them. Unemployment exaserbates the problem, but is not a central cause.

    Parent
    teh collapsing manufacturing sector (5.00 / 1) (#41)
    by Salo on Wed Sep 24, 2008 at 10:02:42 AM EST
    and not just employment stats are to mostly to blame.   The US economy produces financial and other service products, rather than actual material products.  How long could that madness go on for?

    Parent
    Exactly (none / 0) (#47)
    by ruffian on Wed Sep 24, 2008 at 10:15:45 AM EST
    And now even our new financial services 'products' turn out to be junk.  Not going to be able to export them anytime soon. Getting back to a manufacturing economy is going to be essential to recovery.

    Parent
    amen (none / 0) (#50)
    by Jlvngstn on Wed Sep 24, 2008 at 10:17:46 AM EST
    70% service economy carries a tremendous amount of risk...

    Parent
    unemp and flat wages (none / 0) (#48)
    by Jlvngstn on Wed Sep 24, 2008 at 10:16:11 AM EST
    and we are a 70% service economy.  The increase in the ARM's could be offset by new jobs as it creates demand for OT and people take second jobs.  I would have to disagree respectfully with it not being at the center of the issue.  

    No one has been able to answer the question which is how do we climb out of recession historically?  Job creation.  So if we are addressing a potential recession (which is ridiculous as when the numbers are released the next 3 months it will be very clear we are in fact in a recession) how do you best address creating a vaccuum of further and deeper job loss and a stagnating economy?

    Parent

    Job creation in the alternative (none / 0) (#73)
    by hairspray on Wed Sep 24, 2008 at 11:18:47 AM EST
    energy field.  Invest there to jump start the economy. Help mainstreet afford their mortgages and let Wall Street figure out how to fix their problems.  After the election stick it to the CEO's and fashion very tough  legislation and reregulate the industry according to conservative/reasonable  standards.

    Parent
    yes, I was all about infrastructure spending (none / 0) (#81)
    by Jlvngstn on Wed Sep 24, 2008 at 11:27:48 AM EST
    yesterday and that is very short term thinking.  Creating jobs in alternative energy will pump money into creating new technology and spur further growth.  

    Parent
    Said this all along and that the gap... (5.00 / 1) (#103)
    by alexei on Wed Sep 24, 2008 at 12:44:34 PM EST
    between super rich and the rest of us is unsustainable.  We have been living on a credit bubble for decades and this latest one was created to make more and more money in one market - so money chased bad debt.  We should immediately infuse the alternative energy sector, the infrastructure and other "concrete" industries instead of using all this money to bail out the fat cats that got us into this mess.  The Dodd plan is only marginally better - we need a real "New, New Deal" to get the economy jump started by creating new areas for investment that create high wage jobs.  Institute the HOLC, pass Conyers health care bill, infuse the states with funds to help their citizens with energy and food and many other issues.

    Trickle down economics is an abject failure and the continuation of throwing money to the Wall Street thieves is the same old game.  Those companies that can be reasonably saved do it, but the main emphasis should be on Main Street and have a bottom up economic plan.  The Democrats have to stop reacting and propose these measures - you bet then Dems would win big across the board by also doing the right measures.

    Parent

    sounds to me like we need (5.00 / 1) (#109)
    by Jlvngstn on Wed Sep 24, 2008 at 12:53:54 PM EST
    the audacity of hope.  And what we are getting is more of the same, from both of the candidates

    Parent
    if the ARM's (none / 0) (#55)
    by Jlvngstn on Wed Sep 24, 2008 at 10:23:27 AM EST
    are simply "cannot afford after changes" than we should not bail out a single arm.  The banks should take those rates down and cut the loss in LTE and not force it into foreclosure creating this crisis.  They are looking for capital and want to dump the paper instead of helping the American people who are on the hook here by renegotiating the loans that would be viable if the increase was the only the result of the ARM.  I don't buy the ARM argument and if it is a factor than shame on the banks and shame on our politicians for allowing them to manipulate a totally fixable situation.

    I argued this a while back and did not include it in this post but thought it fitting.

    Parent

    Forcing foreclosures does not help the (none / 0) (#93)
    by Christy1947 on Wed Sep 24, 2008 at 12:09:09 PM EST
    banks much, as they will have to hold the properties until the market improves and people again appear who can get mortgages, which could be years, given the substantial increase in mortgage terms we are already seeing (20%  or more rather than the formerly acceptable 10% downpayment, for one). Or sell them at auction for whatever pennies someone is able to pay in cash and is willing to bid. In the worst way banks do not like to have a large "real estate owned' inventory to get rid of.

    Parent
    exactly right (none / 0) (#96)
    by Jlvngstn on Wed Sep 24, 2008 at 12:18:23 PM EST
    they need to address the ARM's not the american public.  They can write down LTE and actually work with the customers at much lower rates and longer terms to address the issue.

    They cannot have it both ways.

    Parent

    "Mistake by lenders" (none / 0) (#90)
    by imhotep on Wed Sep 24, 2008 at 11:59:49 AM EST
    Huh?  Just a "mistake"?
    I see the onus of this mortgage mess being put on the borrowers all the time.
    The lenders, in their efforts to get huge fees and commissions, were the ones who by-passed the responsible lending practices and let unqualified borrowers get the loans.  
    Home ownership has been pushed by this administration since day-one to benefit the banks.
    After 9/11, we were told to "go shopping" to support the economy.  This mortgage melt-down is the result of the same kind of cheerleading.  

    Parent
    The Mortgage companies I saw didn't 'let' (5.00 / 1) (#97)
    by Christy1947 on Wed Sep 24, 2008 at 12:18:47 PM EST
    people get mortgages. They went after people, such as seniors, who did not have the wish for a mortgage before being approached at all, and did a lot of things to induce folk to get mortgages, often unsophisticated folk who didn't know the difference between a fixed rate and an ARM with adjustments, and an Optional ARM which let you skip payments but did not make the consequences clear. Or first time buyers who didn't know the differences and didn't know how much they didn't know, and were encouraged by snake oil lenders who didn't tell them about related penalties, that they would be able easily to refi to a fixed rate before the ARM adjusted, so they didn't need to worry about what it adjusted to. Or switched the papers at the closing to different terms, delivered the Good Faith Estimate for the first time at the closing, disclosed closing costs for the first time the night before the closing, etc etc. All that mattered to the mortgage companies was the closing itself. All of this was in the mortgage company business plan, part of how they routinely did their business. And for some banks as well, where the separation between the sales arm and the underwriting arm was higher than it should have been.

    I've seen too many of those people. It simply does not work to say that the borrowers should have known they could not afford the mortgages and should not have taken them. The mortgage companies were telling them, as professionals, that they COULD afford them.  Far too many were being worked over by experts, who knew they would be out of the loop as soon as the mortgage was made because the entity to whom it would be resold was standing by, so the originator's last relationship to it would be at the closing when the salesmen picked up their relatively large commissions.

    Parent

    Enough Culpability for Everyone... (none / 0) (#99)
    by santarita on Wed Sep 24, 2008 at 12:30:45 PM EST
    There were unscrupulous people at every level in this bubble.

    And there were victims.

    But there were also people with stars in their eyes who thought that real estate prices would also go up and salaries would always go up.  Bubbles are created because there is a shared folly.


    Parent

    What is the Dem plan? (5.00 / 1) (#13)
    by wasabi on Wed Sep 24, 2008 at 08:35:56 AM EST
    There isn't one yet.  The House will have their chance at grilling Paulson and Bernacke today.  I appreciate Schumer hammering that the $700B cost needs to be reduced so that adjustments to "the plan" can be made as initial results are evaluated.

    The whole thing stinks IMHO.

    Am I wrong or did I hear Pelosi (none / 0) (#76)
    by hairspray on Wed Sep 24, 2008 at 11:20:43 AM EST
    suggest a way to gain her support was to add money for infrastructure projects?

    Parent
    The hearing should include testimony (none / 0) (#92)
    by imhotep on Wed Sep 24, 2008 at 12:04:40 PM EST
    from some of the many economists who oppose this plan.
    Paulson and Bernacke are just 2 people.
    Krugman says some people are calling this plan "Hanky Panky" by a Wall St insider.

    Parent
    No Dem plan, just reaction and ... (none / 0) (#106)
    by alexei on Wed Sep 24, 2008 at 12:51:36 PM EST
    marginal "improvements".  The Dems have a shot had totally changing the ball game and they are blowing it!  Dodd is not the one who should be anywhere near this; he is tainted with Countrywide and other corporate deals - there are many excellent ideas that can be implemented quickly and then built on.

    Hammer your reps that this is unacceptable. Call, email write and write Letters to the editor.  Have you spoken with your Senator or Congressman today?

    Parent

    Alternative plan (5.00 / 1) (#16)
    by Jlvngstn on Wed Sep 24, 2008 at 08:48:21 AM EST
    Since 700 billion represents about 215,000 per each sub-prime loan (approx 3.15 million sub-prime loans out there), why don't we send the 215,000 to each sub prime mortgage customer and let them pay their mortgage?

    Sounds ridiculous this way doesn't it?  Sounds like we are "giving" them their homes.  We will give them the money with the caveat that it must all go to the banks who hold their notes and the banks must give them new loans based on the 215k down at 8%.  The banks have a great rate at 8%, have a cash infusion and the subprimers do not lose their homes.

    Does anyone see how ridiculous the plan is when you reverse it?

    The problem isn't just sub prime mortgages (5.00 / 1) (#25)
    by JoeA on Wed Sep 24, 2008 at 09:29:43 AM EST
    any more.

    It's Alt-A loans.  Prime loans are also becoming an issue.  You should check out the blog over at Calculated Risk,  they've been on about this for months.

    Parent

    and helocs (5.00 / 1) (#44)
    by Jlvngstn on Wed Sep 24, 2008 at 10:07:06 AM EST
    that people used to buy cars with.  

    It is easy to modify the above to reflect your points, by sending the money directly to the people who are in crisis, whether it is an sp, heloc, prime or other, the point is still illustrated.  There is absolutely no way Americans would be happy about it or support it if you offered to send the money directly to those who are in need.  Every american who was not getting some money would be up in arms that they were helping other americans in need when they have their owned darned needs.

    I still argue we are looking at this through the financial services prism and not through the what will help us "recover" prism.....

    Bailouts stabilize, economic stimulus through immediate job creation stabilize and strengthen simultaneously.

    Parent

    Exactly... (5.00 / 1) (#113)
    by alexei on Wed Sep 24, 2008 at 01:05:36 PM EST
    Invest in alternative energy and infrastructure to create high wage jobs, institute HOLC, pass Conyers' health care bill, freeze foreclosures, restructure mortgages to keep people in those homes and paying for them, some bail out for viable companies on Wall street.  How hard is this - political will is what it takes.  

    The Dems pass this type of relief where all Americans including fat cats (new investment opportunities and some bail outs) would be helped now.  How about implementing the windfall profits tax on big oil and getting rid of the bankruptcy bill.  How about getting rid of the 10% penalty on 401 (k)'s (many people have been laid off and exhausted all other avenues including savings and accrued large debt)?

    Let's look at the so-called wars: drugs, terror, etc. and the real wars (Iraq and Afghanistan) and move to sustainable and just use of the funding.  Why are giving huge subsidies to corporations who are shifting jobs out of the Country?  Some of these are more longer term, and others can be implemented now.  The Dem Congress can be addressing all of these issues - they don't have to wait for a new President.  Congress needs to get back parity with the Executive Branch and follow its Constitutional Duties.  Plus, Bush is at 24% approval and a lame duck to boot.

    Parent

    Deja vu (5.00 / 2) (#19)
    by ricosuave on Wed Sep 24, 2008 at 09:03:14 AM EST
    This is like 2002 all over again.  Paulson is the new Colin Powell, with the same "trust me" message and the same "accept my plan or we all die" urgency from the Bush administration.  Is there any evidence that the Democrats have grown a pair since 2002, or should we expect them to adhere to the Administration's emergency timeline?  Should we expect the Democrats/Congress to come up with their own assessment of the dangers we face and the solutions necessary or will they just work off of the assessments (and headlines) generated by the Bush administration?

    Here is the leadership for Congress from Obama:

    "I fully support the efforts of Secretary Paulson and [Fed Chief] Ben Bernanke to work in a bipartisan manner with Congress to find a solution," he said.

    and

    "Right now ...the problem is the capital markets and making sure we get something in place quickly," he said. "What we don’t want to do is get too bogged down in some complicated legislative wrangling."

    (from here)

    I read two things here:


    • "Get this off the table quickly" which doesn't bode well for developing any detailed proposals
    • "Demonstrate Bipartisanship" which means Democrats have to compromise away important principles to bring fig-leaf Republicans on board.

    Is my pessimism unwarranted?

    Absolutely (5.00 / 2) (#78)
    by pluege on Wed Sep 24, 2008 at 11:22:27 AM EST
    FISA capitulation Part Deux in the works at the behest of our leader.

    Parent
    Actually on this one, there is at least a (none / 0) (#98)
    by Christy1947 on Wed Sep 24, 2008 at 12:26:27 PM EST
    chance of some bipartisanship since some conservative repubicans don't like this plan for the same reasons posters here don't like this plan. And I understand that Pelosi at least is requiring them to step up to the plate and commit their Republican selves as a condition of making this go forward. So you can't turn the plan against Dems in the next six weeks. I do think what O is doing is trying not to become so hopelessly entangled in the ugly discussions, now that his position is out there and other Dems seem to agree with it and can fight, and be taken off the campaign trail. You and I both know that McC will not be leaving the trail for a vote unless he can use it to grandstand on some point or other, such as the CEO salary red herring, and Palin has no place in Washington anyway.

    Parent
    Two must reads today (5.00 / 2) (#22)
    by Stellaaa on Wed Sep 24, 2008 at 09:20:35 AM EST
    Naomi Klein was on Democracy Now.
    (This is a continuation of yesterday's discussion with Gyraflon)
    She mentioned an article about Henry Paulson in Business Week, written in 2006, this is really important. The article was called Mr. Risk Goes To Washington

    1.  Paulson was CEO of Goldman Sachs and was appointed by Bush in 2006 as Secretary of the Treasury.  

             

    Think of Paulson as Mr. Risk. He's one of the key architects of a more daring Wall Street, where securities firms are taking greater and greater chances in their pursuit of profits
    .

    2. He took Goldman from 20 Billion debt in 1999, to 100 Billion by 2006. Paulson is not afraid of straddling America with 700 billion in debt to save the system he created and was part of.  He was brought on to make the Government more sensible about debt.  

    Also, pay attention to what Newt and those guys are proposing on the side, rather scary.  


    Fascinating piece on Paulson (none / 0) (#46)
    by gyrfalcon on Wed Sep 24, 2008 at 10:13:20 AM EST
    Stellaa.  Many thanks.  You say "two reads," but I'm not finding a transcript for the Naomi Klein interview at the DN site.  Is there one, do you know?

    I don't know whether the choice of Paulson for Treasury was some kind of prescience or sheer dumb luck, but he turns out to be, from what this article says, sort of the uber-expert on exactly the weirdo stuff that's causing us so much trouble.  Snow or O'Neill or somebody like them would have been completely helpless.

    I read somewhere recently, but can't find the source again, that there's been an ongoing battle in the admin. since Paulson came in over the need to put in tighter regulation of the weirdo securities markets in particular but that Paulson has been on the losing end of that argument.

    And as for the "Mr. Risk" title, it sounds scary but according to the article, he's called that because of his ability to differentiate between sensible risk and reckless risk, which is exactly where we are right now.  And my understanding is that Goldman has greatly reduced its debt ratio, now down to something like 1.6 from the 4 cited in the article, which is one of the main reasons they're surviving and Lehman couldn't.

    Don't lose sight of the fact, either, that $700 billion is just the up-front money and the government should be able to make a great deal of that back in a few years, so the ultimate cost to the Treasury won't be anywhere near that.

    Steven Pearlstein of the Washington Post, a terrific financial and business columnist with a very clear head and an ability to explain things clearly to the general reader, said on some program the other day his best guess is that the Treasury will come out somewhere plus or minus $200 billion.  Still not chump change, but not $700 billion either.

    Can you recapitulate what Klein said about Gingrich?

    I saw him the other day on TV, and he sounds to me like he's just taken leave of his senses altogether.  He holds forth regularly these days on Greta Van Susteren's show on Fox, which normally concentrates on tabloid crime stories and missing white women and is hardly the show of choice for political heavyweights to influence the national dialogue. (cough)  That suggests to me that he's having a hard time finding a platform to spout his absurd theories and that nobody much is taking him seriously anymore.  I hope that's the case.

    Parent

    democracy now (none / 0) (#54)
    by Stellaaa on Wed Sep 24, 2008 at 10:21:40 AM EST
    the video or the mp3, I don't know if they have a transcript up yet.  

    Parent
    @gyraflon (none / 0) (#60)
    by Stellaaa on Wed Sep 24, 2008 at 10:35:36 AM EST
    pushed send fast, also read Krugman today, I share his view on the plan and Paulson.  

    What Klein basically says, is that Paulson is part of this whole notion of Shock Capitalism.  At a time of crisis, do massive political change that privatizes public services and changes the regulatory framework of government.  

    Parent

    Well hey (none / 0) (#62)
    by Steve M on Wed Sep 24, 2008 at 10:41:17 AM EST
    we used the last big economic crisis to expand the role of government and implement all those New Deal programs.  Maybe the other side gets a turn now!

    Parent
    Sorry, not buyin' it (none / 0) (#69)
    by gyrfalcon on Wed Sep 24, 2008 at 11:05:17 AM EST
    It doesn't even fit.  Nobody's proposing privatizing public services in this situation, and the regulatory framework is clearly about to get drastically tightened-- which is what Paulson himself is arguing for.

    Not to mention the Bush administration just plain is nowhere remotely near smart enough or competent enough to engineer something like this.

    Can we get back to talking about facts rather than tinfoil hats?

    Parent

    So the 700 billion (none / 0) (#115)
    by Stellaaa on Wed Sep 24, 2008 at 01:17:23 PM EST
    in assets, who will manage that?  The privateers.  Yes, cause, what Paulson is telling us, no one in gov't knows how to do it.  

    700 Billion of public funds, will be moved to capitalize the banking/investment/finance industry, then they will manage those public resources.  You think this is tinfoil?  


    Parent

    I would add the following to the Dem Plan (5.00 / 1) (#27)
    by Stellaaa on Wed Sep 24, 2008 at 09:34:40 AM EST
    A retroactive capital gains tax of up to 30% on all involved in the Finance industry, from CEO's to Mortgage Bankers, the whole lot of them, yes I would add Realtors, they took a chunk.  Pay it back.  

    Retroactive Tax is Constitutionally Suspect... (5.00 / 1) (#63)
    by santarita on Wed Sep 24, 2008 at 10:45:23 AM EST
    but Sen. Corker came up with a great idea yesterday - a one-time levy on "regulated financial institutions".  This would be justified I think by saying that all of these institutions will benefit directly or indirectly and they should bear at least  the administrative expense of the Paulson Plan.

    Imposing a one-time significant levy would probably have the same effect as a retroactive tax.  And would have the consequence of depressing the ability to issue dividends and huge compensation packages.

    Parent

    That's a darn good idea (none / 0) (#77)
    by gyrfalcon on Wed Sep 24, 2008 at 11:20:54 AM EST
    I'm not familiar with Corker.  Does he generally know what he's talking about on this kind of thing?  Framing it as "administrative costs" is brilliant. It's not punitive or confiscatory, it's just sharing the burden of implementing the program.  Who could credibly complain about that?

    Parent
    Corker is the Repub. Senator from Tennessee... (none / 0) (#85)
    by santarita on Wed Sep 24, 2008 at 11:42:17 AM EST
    and former mayor of Memphis or Nashville.  

    I can't vouch for his expertise but he did ask good questions and I liked the idea of a levy.  What I see in the Paulson proposal is a bonanza of fees for Wall Street and big banks (as happened in the Bear Stearns situation).   This is just galling.  A levy that pays for these fees would make that aspect a little better.

    Parent

    Unfortunately, that's the way (none / 0) (#111)
    by gyrfalcon on Wed Sep 24, 2008 at 12:58:53 PM EST
    our capitalist system works.  The folks with the money always find a way to squeeze more of it out of any given situation, and that's what makes the system go 'round.

    I'm actually surprised to see this levy idea come out of a Republican.  Amazing how many of them have suddenly discovered the political advantages of railing about "the little guy."  I trust no Republican politician any further than I can throw them, but I'm always happy to poach the rare good idea one of them comes up with.

    Parent

    Realtors have absolutely nothing to do (none / 0) (#30)
    by tigercourse on Wed Sep 24, 2008 at 09:52:03 AM EST
    with the problems caused by the bad mortgages. Do you think Realtors have anything to do with setting mortage rates and terms? And, given that the average earning of a Real Estate agent is somewhere around 35,000, I'd hardly say they got rich.

    Parent
    I beg to differ (5.00 / 1) (#33)
    by ruffian on Wed Sep 24, 2008 at 09:57:45 AM EST
    The real estate industry has everything to do with the propaganda that houses always appreciate, and buying a house right now is the best thing you can do financially, even if you have to get into a dicey mortgage to do it.  They continue to push the line that the housing prices have bottomed out, so now is a good time to buy, even though the areas most affected by the buggle, California and Florida, are nowhere near that point.

    Average earnings of real estate agents are a very misleading. Full time agents in California and Florida made much more than that by inflating the bubble.

    A good chronicle of the bubble is at Irvine Housing Blog

    Parent

    I've always been under the impression (none / 0) (#56)
    by tigercourse on Wed Sep 24, 2008 at 10:23:45 AM EST
    that the Democratic party supported tax hikes because it believes that necessary social programs needed funding.

    If we are going to start raising taxes on everyone that we think deserves to be punished for making mistakes or even being greedy, it's going to be a long, long list.

    Parent

    I agree with you on that (none / 0) (#94)
    by ruffian on Wed Sep 24, 2008 at 12:09:56 PM EST
    I did not mean to endorse the idea of real estate folks being taxed more, only to say that they were not innocent in all of this.

    Taxing based on occupation is a bad idea IMHO.

    Parent

    Will never work. Realtors earned a (none / 0) (#38)
    by independent voter on Wed Sep 24, 2008 at 10:01:50 AM EST
    commission for work they did on home sales It is NOT capital gains, it is income. If you seriously support a retroactive ADDITIONAL income tax on just a select group of workers, I would love to see how you think that would be accomplished. Who's next...the LAWYERS for charging too much per hour???????

    Parent
    They inflated the prices (none / 0) (#42)
    by Stellaaa on Wed Sep 24, 2008 at 10:03:16 AM EST
    the overbidding, the hype, they were part of the equation.  I am sorry if it hits home but they pumped up the prices.  

    Parent
    I am not a realtor, so no (5.00 / 2) (#51)
    by independent voter on Wed Sep 24, 2008 at 10:18:52 AM EST
    it doesn't hit home. (I really don't even care for most realtors...but your logic is faulty) You do not know what you are talking about to place the blame of inflated prices on the realtors. The prices were driven by demand due in great part to the easy availability of credit. Homes were being bid up ABOVE asking price by hordes of eager buyers. Builders would hold auctions to allow prospective customers to BID on homes. This is not the fault of realtors. In your eagerness to pin blame, you are looking in the wrong direction. The people who are now looking for handouts from the American public are the ones that created this mess to begin with. They falsely rated the risk of the mortgage loans they were pushing out to lenders and brokers. These loans would have been fine had they been risk rated properly...meaning rates of 11-15%. Then the investor knows what they are buying, potential for great return with a lot of risk tied to it. The problem is the riskiest mortgages were bundled together with the best quality mortgages and sold as a unit, while being rated as if all the mortgages in the package were A paper.

    Parent
    In California (none / 0) (#61)
    by Stellaaa on Wed Sep 24, 2008 at 10:40:38 AM EST
    the Realtors constantly pushed buyers to make offers that were higher than asking price.  The appraisers, also part of the mess, also helped.  This industry needs reform from top to bottom.  No one is without guilt.  

    I have no idea of other markets, but the realtors should have been telling people not to buy some of the houses they bought.  

    At this point the entire sector has  a big black eye.  

    Collectively, they took the single piece of wealth that Americans have, the equity in their homes, and drove it down to zero, I hope the real estate prices stabilize.  

    Parent

    I can see we will not agree on this. I believe (5.00 / 2) (#64)
    by independent voter on Wed Sep 24, 2008 at 10:48:26 AM EST
    you are oversimplifying the many factors that have played into where we are right now, and blaming the little guy just trying to pay his/her own mortgage, rather than the big corporations that profited the most from these transactions. The beauty of America...we do not have to agree!

    Parent
    I don't think you understand, 1) Realtors (5.00 / 2) (#66)
    by tigercourse on Wed Sep 24, 2008 at 10:55:24 AM EST
    generally don't know how financially solvent a buyer is. They don't have access to their acounts, they don't know how much they make. They aren't like a bank, which scrutinizes the net worth of the buyer. Realtors don't know how much someone can truly afford. They have no practical ability to say "you can't afford this house" (an if they are talking to some kind of minority, HUD could come in and smash them).

    2) Realtors don't set the prices of homes. The market does. If their client wants a house, they can't simply tell them they shouldn't bid on it because it might be worth less (Realtors don't know how much a house is "worth"). The house is worth whatever people are willing to pay for it. The house has no intrinsic value. No goods do. All goods are worth whatever the market is willing to pay.

    Parent

    I am not saying the big guys (none / 0) (#68)
    by Stellaaa on Wed Sep 24, 2008 at 11:03:06 AM EST
    are not to blame.  
    But in the layers of the transaction, the buyer, the mortgage broker the Realtor.  The realtor and the mortgage broker are fee driven.  They do not give a hoot about the outcome.  The buyer is under the illusion that the two professionals represent his/her interests and will advise him.  

    Of course the realtor does not know the finances, was I born yesterday?   But they know the rules of thumb of home buying.  

    If you think that the Realtors and Mortgage brokers had no part in this then enjoy your delusion.  They were all part of the boom/pyramid/ponzie scheme.  

    Over bids became a rule rather than the exception, Realtors pushing buyers to over bid.  What do most buyers know about markets?  Little to nothing.  They take the cues from the "professionals".  

    Parent

    There is no such thing as overbidding. If (5.00 / 1) (#70)
    by tigercourse on Wed Sep 24, 2008 at 11:10:32 AM EST
    someone wants to buy a house, and there are bids that are higher, they need to raise their bid. It's pretty obvious. Are you suggesting that Realtors should stop representing clients if they want to bid higher on a property?

    And I never said that mortgage brokers had nothing to do with it. There are alot of people who shouldn't have gotten loans.

    And Realtors aren't fee driven. They are commission driven.

    Parent

    Commission driven sorry, (none / 0) (#110)
    by Stellaaa on Wed Sep 24, 2008 at 12:58:22 PM EST
    it walks and talks the same way.  One calls it a fee, the other a commission, both are contingent on the transaction.  Same thing.  

    Are you serious?  The real estate price orgy was driven by Realtors telling buyers to overbid all the time or they would not get the house.  Buyers don't know what to bid most the time.

    Parent

    Having just been through it (none / 0) (#82)
    by gyrfalcon on Wed Sep 24, 2008 at 11:28:22 AM EST
    on both ends of the transaction, I can testify to that.

    On the selling end, my broker did ask for some information about the buyers' financing in order to protect me, but when he got the paperwork that the buyers' bank had approved the mortgage terms, that was his only concern.  It was up to the bank to make the risk assessment and set the mortgage terms.

    On my end as a buyer, my buyer's agent guided me in making my offer, but she knew nothing about my financing and didn't ask, so her guidance was solely in terms of how well the asking price of the property I was interested in matched its actual market value.  In the end, I decided to just pay cash for the property rather than finance through a mortgage-- thank God.

    Parent

    Good realtors advise their clients... (none / 0) (#88)
    by santarita on Wed Sep 24, 2008 at 11:50:36 AM EST
    about pricing (both for selling and buying) based on a good understanding of local market conditions and a good understanding of what their clients want.  There definitely (at least in California) a period of time in which buyers who wanted a particular property were advised (rightly) to overbid.  That was the market.

    But not every realtor is good.  

    And unfortunately some realtors had related businesses (as mortgage bankers or mortgage brokers).  So there was perhaps a big incentive for those lenders to make deals which would benefit the realty side.

    There are obvious conflicts of interests and I think that laws and regulations cannot totally eliminate the conflicts.  The savvy buyer or seller understands that their agent has an inherent conflict and takes the advice with a grain of salt.

    Parent

    I didn't work in a Developers' climate. (none / 0) (#100)
    by Christy1947 on Wed Sep 24, 2008 at 12:33:02 PM EST
    My area was all preowned housing stock, and the worst developer we had was a coop or condo converter of a single previously existing building, and not a very large one. In my area, every broker 'knew' banks or loan companies they could and many did recommend to buyers who didn't already have their financing in place before going out looking, which was most buyers. Now, most at least know they should have their financing in place so they will know what their lender will lend, and can restrict their hunts accordingly. But it was not so, then. And a lot of the buyers took the steer, and didn't know to look further when the steered-to company was prepared to go forward, and had the imprimatur of the broker.

    Parent
    Hey!!! (none / 0) (#43)
    by Big Tent Democrat on Wed Sep 24, 2008 at 10:04:14 AM EST
    You'll get banned for comments like that.

    Parent
    I thought you might appreciate that:-) (none / 0) (#52)
    by independent voter on Wed Sep 24, 2008 at 10:20:13 AM EST
    I think there's a good chance (5.00 / 1) (#36)
    by Green26 on Wed Sep 24, 2008 at 10:00:42 AM EST
    the government will ultimately make alot of money on the bailout. They will buy at somewhere between the current low market price (25%) and the value of the collateral (75%)--and either hold to maturity or sell at something more than the purchase price.

    This assumes that the bailout results in stabilization of the market for these assets/securites, and the economy.

    The government has the ability to hold the assets. Some of the financial institutions don't have the ability to hold and weather the storm.

    Again, note that the value of the underlying collateral/real estate is still significant (and much higher than current market value of the securities).

    I agree with the NY Times writer that the other issues holding up the bailout are side issues, not really related to the bailout, and should be dealt with later. This does not include waiting to obtain more information on how the bailout will work and whether it will work.

    Haven't heard anything about derivative markets (5.00 / 1) (#59)
    by OldCity on Wed Sep 24, 2008 at 10:34:38 AM EST
    These markets were certainly drivers of the current problem.  Yet, we haven't seen anything in any legislation or plan that regulates them.  They are as free as they have been.  

    We just shouldn't acquiesce to buying bad debt if we first don't see lenders' utilization of the Fed's offer to allow low interest borrowing to lenders.  With tools such as that available, the at risk companies should first have to extend themselves in that regard.

    It's just incredible that the plan essentially asks Congress to forego so many powers.  How could the Congress ever agree?  The Republican Congresses of 2000-2006 gave up so much oversight, or forewent overseeing various industries, gov't programs, etc, that to actually give even more in that area, now, would be abject political suicide.  If Congress must agree to action, then Pelosi and Reid should demand full Republican support, or refuse to move it forward.    

    Hopefully (none / 0) (#1)
    by lilburro on Wed Sep 24, 2008 at 07:45:40 AM EST
    it will be clear to the nation that the Bush plan did not work, but the Dem plan will work.  Let's see McCain try to co-opt the Dodd plan...I don't think he will be able to.  Maybe Obama will be able to send to Dodd in November a nice thank you card - "Thanks for the votes!"

    This will be known as the Bush-Dodd -Pelosi plan (none / 0) (#29)
    by ruffian on Wed Sep 24, 2008 at 09:49:26 AM EST
    McCain and the other Reps in Coingress will run against it, not co-opt it.

    Though Dodd's plan is better, it is, to use a phrase, putting lipstick on a pig.

    I am back to my anger of the weekend.  We are sooooo screwed.

    Parent

    I read that McCain proposed putting whatever (none / 0) (#83)
    by hairspray on Wed Sep 24, 2008 at 11:30:12 AM EST
    deal they came up with on the web. He said let the public see the agreement. That sounds stunning.

    Parent
    Maybe McCain can email me a copy... n/t (5.00 / 1) (#87)
    by lilburro on Wed Sep 24, 2008 at 11:48:04 AM EST
    Correct me if I'm wrong but (none / 0) (#2)
    by WS on Wed Sep 24, 2008 at 07:53:37 AM EST
    equity stake, mortgate relief, and bankruptcy rewrite are the two big ones.  Or is it just equity stake?  Is there a way to cut down the $700 billion or is that the final number?  

    In the future (and hopefully under an Obama Presidency), I think there should be a new RTC similar to the HOLC idea Hillary proposed.   Health care might be a bit further down the road because of the debt but we can get increased regulation on the financial sector.  

    EDIT: Three big ones (none / 0) (#3)
    by WS on Wed Sep 24, 2008 at 07:53:53 AM EST
    The 3 are key (none / 0) (#4)
    by Big Tent Democrat on Wed Sep 24, 2008 at 08:02:36 AM EST
    The Poulson Plan Sec 6 & 8 (none / 0) (#5)
    by Saul on Wed Sep 24, 2008 at 08:05:09 AM EST
    Sec. 6. Maximum Amount of Authorized Purchases.

    The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

    Sec. 8. Review.

    Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

    Does the Dodd Plan have this also?

    No Reivew by anyone is totally unacceptable and the line of credit is too much

    No (none / 0) (#11)
    by Big Tent Democrat on Wed Sep 24, 2008 at 08:25:33 AM EST
    "Outstanding at any one time" (none / 0) (#101)
    by Christy1947 on Wed Sep 24, 2008 at 12:38:31 PM EST
    this means if Paulson gets money paid back, he is authorized to use it again. Not a one time bailout but a rolling process. Ouch.

    Parent
    Could be a Good Thing... (none / 0) (#112)
    by santarita on Wed Sep 24, 2008 at 01:01:05 PM EST
    If the Fed gets repayments then it means that its theory (that these instruments are underpriced) is working.  If the theory is correct, after it does the first few deals, the market price is set and the whole line will never be drawn.

    It is fascinating to watch a revolving line of credit facility negotiated on live tv.  Better than watching Survivor.

    Parent

    I heard (none / 0) (#9)
    by connecticut yankee on Wed Sep 24, 2008 at 08:17:00 AM EST
    An MSNBC reporter said this morning that 65 cents was a likely result.

    that is 45 cents (5.00 / 1) (#21)
    by Jlvngstn on Wed Sep 24, 2008 at 09:17:05 AM EST
    more than they are "worth"

    Parent
    I agree (none / 0) (#39)
    by ruffian on Wed Sep 24, 2008 at 10:02:12 AM EST
    I will be astounded if they are worth more than 30 on the dollar.  If they were worth 65, investors would be buying them without this plan.

    Parent
    As I have read in the NYT, the trick of this (none / 0) (#102)
    by Christy1947 on Wed Sep 24, 2008 at 12:42:17 PM EST
    pricing is to have the govt. create a market base price for whatever it is buying so that others can find it in themselves to trade there again. Paulson has talked about buying some of these for more than market in order to encourage others to get back in, and begin the market working again, rather than stalling out as it now is. Pricing is one thing they are at hammer and tongs, since if the present mark to market is 25% and people are not buying, the trick is to find the point where they will start again, reliably, instead of going the panic route again as the foreclosures pick up because there are still no available refi options and the mortgages themselves cannot be bought whole because of the splintering caused by securitization.

    Parent
    yes (none / 0) (#107)
    by Jlvngstn on Wed Sep 24, 2008 at 12:51:44 PM EST
    the theory is that they do not know how much bad debt they have on those books and are afraid to lend creating overextension or overexposure.  

    The theory then postulates that the market will free up cash to be borrowed.  Of course since small businesses are undercollateralized and they employ 35% of the american workforce, how will they borrow to keep the businesses afloat?

    Warren Buffett who is a gazillion times smarter than I says that this will prevent a precipice.  I feel like a complete idiot arguing against the stance of the most respected financeer in the country and possibly world but I don't see this as a path to any recovery for the american public.

    Parent

    How many Democrats are against any bailout? (none / 0) (#20)
    by Manuel on Wed Sep 24, 2008 at 09:14:21 AM EST
    It's clear Paulson's plan doesn't poll well.  Is the Dodd plan any more popular?  Unfortunately, the philosophically consistent populist position of the no government intervention anti Wall Street Republicans seems to resonate with the public.  Obama and McCain are keeping their options open.  It is interesting how studiously they are avoiding a position.  They understand that the wrong choice may cost them the election.  Will either want to be associated with the final plan if there is one?  If there isn't, will either of them decry inaction in Congress?

    yes to the Warren Buffet plan (none / 0) (#24)
    by Katherine Graham Cracker on Wed Sep 24, 2008 at 09:28:40 AM EST
    Let the people who made the most money on the factors causing the problems --bail it out.

    Angela Mozilla --step up to the plate and the Pritzker family too

    Buffett, Mozilo & Dodd (none / 0) (#75)
    by robrecht on Wed Sep 24, 2008 at 11:20:21 AM EST
    I don't think Buffett has been huge in this sector previously.  Recall that he passed on Countrywide and Lehman Bros.  And Buffett is also betting on and pushing for the bail-out so he probably wouldn't see his plan as an alternative.

    Angelo Mozilo (two o's), on the other hand is a crook and should be in jail according to some--wonder what Dodd thinks now.

    Parent

    question (none / 0) (#26)
    by Katherine Graham Cracker on Wed Sep 24, 2008 at 09:32:48 AM EST
    how will they unwind the securities to take out the "bad" loans

    Good question (5.00 / 1) (#28)
    by gyrfalcon on Wed Sep 24, 2008 at 09:47:27 AM EST
    I don't know if they can.  A lot of these securities are a total mixture of bad risk and good risk mortgages, which was sort of the point of bundling them, to blunt the effect of the bad ones that fail by packaging them in with the good ones, sort of like a health insurance pool that includes some very sick people in with a lot of healthy ones.

    I can't even begin to imagine the level of paperwork involved in, say, taking a single security that bundles up 1000 and going through them mortgage by mortgage to figure out which ones are the "bad" loans.

    I think this is a big part of the problem, that these things are such a mish-mash that with the falling housing market, nobody can figure out what they're worth and what the overall level of risk is, and so they don't want to buy them.

    Parent

    Difficult but not impossible... (none / 0) (#67)
    by santarita on Wed Sep 24, 2008 at 10:58:09 AM EST
    I think that one of the ideas (and it is in the proposed Paulson bill) is to appoint financial institutions as agents of the Fed for the purpose of assisting the Fed in this endeavor.

    I think the Fed believes that these securities and instruments are undervalued in part because people are making assumptions about the underlying mortgages and once the Fed takes over one of these spaghetti piles and looks at the mortgages  it will be better than people think.  A lot of people think the Fed and Treasury are hallucinating and/or not being upfront in just saying that what they are intending to do is set the price on these spaghetti piles at a price over what the market thinks they are worth.

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    Maybe you're right (none / 0) (#72)
    by gyrfalcon on Wed Sep 24, 2008 at 11:16:40 AM EST
    but I still think it's an almost impossible task to unwind this stuff.  They'd need battallions of expert mortgage underwriters to unroll this stuff, not securities traders/analysts/whatevers, and I haven't heard anything about that, have you?

    I don't know, I'm just speculating. (Oops! Bad word!)

    The thing is, as I understand it, the market has no idea what they're worth and the bulk of it actually has no market value at all right now.  The price that was paid for them can't be used to establish market value because the actual value has certainly declined, but by some unascertainable amount.

    By buying up a bunch of the worst of them, the government will be establishing a de facto market value, which theoretically should unlock the freeze on the better stuff.

    It comes down to whether one thinks Paulson will do his best to get the government the best deal possible while achieving the goal of getting the money flowing in the system again, or believe he's an evil mendacious Bush stooge who's only out to pour taxpayer money into his friends' wallets.

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    I have heard (none / 0) (#80)
    by Steve M on Wed Sep 24, 2008 at 11:27:33 AM EST
    that they are worth 20 cents on the dollar, according to this noted expert.

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    I've heard all kinds of guesses (none / 0) (#105)
    by gyrfalcon on Wed Sep 24, 2008 at 12:47:25 PM EST
    But they're all just guesses.  And I assume that different classes of these things will have different values in the end, so trying put one percentage figure on the whole lot isn't particularly helpful.

    But the point is, whatever various "experts" think here or out in the "real world," the market, potential buyers, obviously don't agree.

    I think a lot of it, too, is going to depend on what bill gets passed and how long it takes and what's been developing between then and now.

    One thing this is not is a static situation.


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    Paulson is struggling to find... (none / 0) (#89)
    by santarita on Wed Sep 24, 2008 at 11:58:17 AM EST
    a solution that preserves the notion that the market is the best arbiter of value.  Unfortunately, in order to get the market to set the right price the Fed has to step in to goose the market.

    An underlying problem is the drag on institutions' balance sheets.  I wonder why they can't directly deal with this instead through Regulatory Accounting Procedures which would be different than GAAP.  That might make our markets less desirable to foreign investors, but I think that ship has already sailed.

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    Ship has sailed for now (none / 0) (#108)
    by gyrfalcon on Wed Sep 24, 2008 at 12:52:56 PM EST
    but if the foreign investors think we're getting back on track, they may come back into port.  There's still an increasing amount of money sloshing around in places like China, and they've got to do something with it.  (That's how this whole wild market for mortgage-based-securities and the like got out of control to begin with, is my understanding.)

    When you get into Regulatory Accounting Procedures and GAAP, though, you've lost me.  Can you explain what those are and the significance of the difference easily?

    I'm just an ordinary twerp with no special expertise, just been reading a lot in the last few weeks.

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    RAP vs GAAP (none / 0) (#114)
    by santarita on Wed Sep 24, 2008 at 01:10:37 PM EST
    I believe that RAP accounting was used in the S & L bailout.  I know that it was used in the Farm Credit bailout that preceded the S & L bailout.  GAAP is an acronym for  generally accepted accounting procedures.   GAAP is a way of minimizing funny accounting or cooking the books so to speak.  It is a way for lenders and investors of feeling comfortable that everyone is speaking the same language when they use terms like surplus, reserves, etc.  RAP accounting is basically a way of acknowledging that balance sheets and financial statements wouldn't look so good under GAAP accounting.  But for regulatory purposes the balance sheets and financial statements calculated under RAP would eliminate the possibility that regulators would step in.  Employing RAP accounting is basically a way of saying that there are two sets of books.  Not a good scenario but a useful temporary one.

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    I'd like to see them do that (none / 0) (#95)
    by imhotep on Wed Sep 24, 2008 at 12:13:20 PM EST
    Take apart some of these CDOs to see what they're talking about.
    There's a rush to get something done not only because of the scare-tactics used by Paulson, but because Congress wants to recess eom to campaign.  

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    Paulson will hire "experts" (none / 0) (#31)
    by ruffian on Wed Sep 24, 2008 at 09:52:12 AM EST
    "the best and the brightest" he called them yesterdya.  Probably the same guys who put the packages together in the first place.

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    Best and brightest? (5.00 / 1) (#45)
    by ricosuave on Wed Sep 24, 2008 at 10:07:40 AM EST
    Aren't those the Enron guys?

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    Smartest guys in the room! (5.00 / 1) (#49)
    by ruffian on Wed Sep 24, 2008 at 10:17:24 AM EST
    Man, that was a really bad (5.00 / 1) (#58)
    by gyrfalcon on Wed Sep 24, 2008 at 10:29:50 AM EST
    choice of words, wasn't it!

    He's got to hire people who understand this stuff and have a clue how to sort it out.  It's unlikely to be the people who put the packages together, I think, but will certainly be people who've had experience buying and selling them.  I'd sure like to know who he has in mind.  Was that discussed at all in the hearing yesterday?

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    No, not really discussed although ... (none / 0) (#65)
    by santarita on Wed Sep 24, 2008 at 10:49:09 AM EST
    I think lightbulbs were flashing on for some of the Senators because they understood that the people who understand these instruments comprise a relatively small group.

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    I was polled for the first time ever last night (none / 0) (#32)
    by Exeter on Wed Sep 24, 2008 at 09:52:49 AM EST
    It seemed to be an Obama internal poll. Anyway, they asked how certain I am going to vote for Obama and I said definitely. Then they asked if there was any possibility that I would consider voting for McCain and gave the multiple choice answer just up from zero, which was something like "very small chance."

    Anyway they then went into this exhaustive multiple choice quiz of things on the economy and especially the bailout and how if various positions would make me more or to vote for Obama / McCain.  (No, it wasn't a push poll.) Anyway, I REALLY started to get bored after about ten minutes and after 20 minutes (when it ended) I was barely listening to the questions.  Very technical questions about how to deal with the economy and how to deal with the bailout.

     

    What state do you live in? (none / 0) (#34)
    by andgarden on Wed Sep 24, 2008 at 09:57:45 AM EST
    Wow. (none / 0) (#35)
    by ruffian on Wed Sep 24, 2008 at 10:00:21 AM EST
    Probably part of his debate preparation.

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    They stopped calling me (none / 0) (#40)
    by Big Tent Democrat on Wed Sep 24, 2008 at 10:02:30 AM EST
    after I told them that there was no chance in hell I would not be voting for Obama.

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    Read Robert Reich today (none / 0) (#57)
    by Jlvngstn on Wed Sep 24, 2008 at 10:27:46 AM EST
    All Financial Terrorists to Gitmo (none / 0) (#74)
    by pluege on Wed Sep 24, 2008 at 11:19:53 AM EST
    All of the heads of the Wall Street firms that are in trouble should be shipped to Gito as financial terrorists and held for 3-4 years, maybe more until we can get around to trying them in Military Commission  for their crimes terrorizing Americans and destabilizing the world order.  

    Yeah, that seems reasonable. Maybe we (none / 0) (#79)
    by tigercourse on Wed Sep 24, 2008 at 11:25:26 AM EST
    should take everyone with credit card debt out back and shoot them.

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    Only if they default (none / 0) (#86)
    by pluege on Wed Sep 24, 2008 at 11:43:20 AM EST
    Allowing bankruptcy judges (none / 0) (#116)
    by Green26 on Wed Sep 24, 2008 at 01:47:18 PM EST
    or some third party to adjust the payment provisions of troubled underlying mortgages will make these securites/assets even less valuable and will introduce additional uncertainty into their valuation and the market.

    This would make it even more difficult for the government bailout agents and the market to set prices and determine the value of the securities/assets--because it will not be known or determinable now what the bankruptcy judges or third parties might do in that regard.

    This would introduce more risk to the government, probably reduce the prices the government would agree to pay the financial institutions, and likely slow down the purchases/bailout.

    However,... (none / 0) (#117)
    by santarita on Wed Sep 24, 2008 at 02:14:57 PM EST
    which is worse: keeping loans(or REO)  on the books that are undersecured without a reasonably foreseeable chance that the loan will ever be paid according to its terms (or at least for the foreseeable future) or seeing some possibility of turning a non-performing loan into a performing loan?

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    Not at all (none / 0) (#118)
    by Steve M on Wed Sep 24, 2008 at 03:12:08 PM EST
    The reason the securities are impaired right now is because of the risk of default.

    Restructuring will always result in a greater recovery for the lender than would an out-and-out default.  And a restructuring in bankruptcy is likely going to result in the lender being paid a substantial percentage of the balance due under the mortgage.  They're not going to be letting debtors pay off their homes for $10/month.

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