Tuesday, September 30, 2008

Paulson wants your money

You! Fork it over!

Well, the vote on that bogus bailout plan certainly was a squeeker, but apparently the citizens knew which side was up, even if Congress didn't. Reports from representatives' offices say that the incoming emails, phone calls and passenger pigeons was roughly 100-1 against a bailout, and this was without any community organizers rousing the citizenry.

Of special note are the several hundred professional economists around the country who think the holdup bailout - or at least the scam plan as originally proposed by Treas Sec Hank Paulson - was naked theft, and signed a petition to that effect. See here.

But what to do, what to do? This really is a mess, with worldwide ramifications - the queen of England had her allowance frozen, Gadzooks! - and stock markets globally are falling over the proverbial cliff. McCain was clueless, but the godlike Obama actually came up with a plan, which has been endorsed by George Soros, no less, although I wouldn't be surprised to learn that Soros wrote the plan himself and slipped it to Barry in the dark of the night. Anyhoo, from the Economist, here's George:

Mr Paulson’s record does not inspire the confidence necessary to give him discretion over $700bn. [No shit] His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund “broke the buck” and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.[Hank's wife is on the board of AIG, BTW]

Mr Paulson had got a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Mr Paulson’s hand and he had to take them over.

Mr Paulson’s proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. The proposal is also rife with latent conflict of interest issues [You think?]. Unless the Treasury overpays for the securities, the scheme would not bring relief. But if the scheme is used to bail out insolvent banks, what will the taxpayers get in return? [Ooh, ooh - I know the answer to that one= zip, zero, and a lifetime of tax slavery!]

Barack Obama has outlined four conditions that ought to be imposed: an upside for the taxpayers as well as a downside; a bipartisan board to oversee the process; help for the homeowners as well as the holders of the mortgages; and some limits on the compensation of those who benefit from taxpayers’ money. These are the right principles. They could be applied more effectively by capitalising the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities.

The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices.

Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners’ ability to pay.

The rescue package leaves this task undone. Making the necessary modifications is a delicate task rendered more difficult by the fact that many mortgages have been sliced up and repackaged in the form of collateralised debt obligations. The holders of the various slices have conflicting interests. It would take too long to work out the conflicts to include a mortgage modification scheme in the rescue package. The package can, however, prepare the ground by modifying bankruptcy law as it relates to principal residences.

Bearing in mind that Joe Biden was a prime sponsor of the piece of shit Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 [sic, sic, sic & sic], that last bit is probably a non-starter, too.

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