Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are considering a new plan to address the credit crisis, said Senator Charles Schumer, who proposed an agency to pump capital into troubled banks.
``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today. ``I've been talking to them about it.''
Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable. His remarks indicate momentum is building for some wider plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.
Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would ``simply transfer excessive risk to the U.S. government without addressing the plight of homeowners,'' he said.
Treasury spokeswoman Michele Davis didn't immediately respond to a request for comment and Fed spokeswoman Michelle Smith declined to comment.
Why is this a dumb idea? Let me count the ways.
1.) Where is the money for this going to come from? I've detailed the proposed spending plans we've seen so far. They total $900 billion. Now we're going to pump more money into the system from some as yet unknown source.
2.) Just what will the government do with these interests? They're going to wind up the majority shareholder in some of these institutions -- and a minor big holder in others. Who will decide the government's policy?
3.) What is the criteria for investing in a company? If ever there was going to be a highly politicized process this is it. I can see it now ... "Senator from big important district gets huge cash infusion not because it's a good investment but because the Senator is in a close reelection bid and needs votes.
4.) Will the government ever get out of these companies? Will there be a time limit?
5.) Will there be a time limit for this entity's duration? Will it go on forever?
6.) Will the government become intimately involved with the company's internal deliberations and policy? Will Congressmen sit on various boards?
I could go on, but you get the idea. This is a disaster waiting to happen.
14 comments:
Well, it bought back half the week's losses in the last 2 hours of trading - so it served some short term purpose
I feel like I've been sucker-punched.
I have to disagree here, bonddad.
Let's just take as a given for the moment that Uncle Sam is going to do some sort of bailout.
It can:
1) guarantee the bonds and tell taxpayers, "too bad"
or
2? it can obtain equity stakes a la the Chrysler bailout of the 1970s, giving the taxpayer reasons to expect a payback. And then it can sell its interest in whole or in part when conditions improve, giving the taxpayer a nice return for their risk.
Now, we can debate whether or not bailouts should take place, but in my book, it's no contest, number 2 is far superior.
Let's not take it as a given that Uncle Sam should do a bailout.
Uncle Sam uying the equity is basically a transition from a capitalist economy to a socialist economy--actually, Fannie Mae was basically expropriation without payment, which is lower down the stake than socialism.
It didn't work in Russia, for reasons explained here, and it won't work in America.
Dear George Phillies:
It worked with the Chrysler bailout of the 1970s.
Over to you ....
I heard talk on CNBC today of possible financial terrorism and they were not being metaphorical.
In other words, there may be an entity out there trying to bring down capitalism.
This was postulated when the shut down of "traditional short sellers" today -- which is OK in their opinion -- revealed a continuing, artificial, effort to bring down prices deliberately.
Is this really happening? Or was it idle specualtion? If so, such on-air speculation is grossly irresponsible.
Doen anyone have more info on this, and assuming it's true, are current steps to defend against it adequate?
It's called regulating the Un-regulated and I for one say it's about time.
So, I don't think it's a disaster at all. I call it " Just deserts"
Wall Street had it coming to them and now let them see how it is looking for a job.
They have to go get re-tooled, because their services are no longer EVER required.
The gov't can take over all the banks and investment houses as far as I'm concerned.
By the way, Sept trading has been off the chart for me this month. Not like August at all---
65W and 6L
So do the bank Investment Strategists and Fund Managers get to keep their jobs and bonuses?
If so, what a sweet deal for them!
A 400 point rally based on rumor, without much in the way of details?
Wow, this market is really running on fumes...
As my father said to my crazy sister, "all out go, no in come, no good."
It's called fascism, and it's what we did in the Great Depression, we made loans and bought the preferred stock in ailing banks and companies. Might even still own that stock, who knows.
I have no objection so long as we pay for the stock in greenbacks that the government creates without any interest obligation. Make them legal tender.
The other solution is to call all these wall street companies enemy combatants, send the CEO's to Gitmo and seize their assets, and repudiate their debt.
What you are seeing today is nothing more than the financial terrorism that gave us the Great Depression and 10 years of misery. Market instability will continue until the financial terrorists get what they want, and that is for the Fed be in charge of the whole ball of wax, and government insolvency that will end the USD as the reserve currency.
BY the way, owning 80% equity in AIG might pave the way for the privatization of SS and mandated health insurance with special deals through AIG owned companies. Of course, once we default on our debt, the IMF will seize these assets. They are scheduled to do an audit on the Fed in 2009, and might not be pleased with all the toxic waste the Fed is calling as their assets.
Dear Mr. Norquist:
You're going to need a bigger bathtub.
Sincerely,
DD
Bonddad,
totally disagree with you here. Schumer's idea is likely to be far more cost-effective than the RTC/HOLC idea being tossed around by Treasury. the basic point here is that instead of just taking on the banks' bad assets and bailing out the entire banking system, you create an entity (in addition to the RFC in the 30s, which was widely considered a resounding success, you have Sweden which also did something similar) that chooses which banks it thinks are most viable, recapitalizes them in exchange for a mix of secured debt and equity, and maintains some control over the lending of the banks to ensure that govt money isn't simply being used to "double down" on more bad loans.
The basic point here: if we're talking about a massive bailout, why just take the bad assets from the books of the banks? The government will be spectacularly bad at valuing these assets, and we're likely to take a bath. On the other hand, if you create a public policy-focused SWF (in essence) and use that entity to selectively recapitalize banks, you are in effect saying that the banks will appropriately value their assets in disposing of them. And the government will be both shielded against the downside (through secured debt) and share in any upside.
FYI, RFC and the Swedish intervention didn't lose moeny, but in fact made money.
Another way to put this: this is very similar to what Krugman is talking about in his column today. It's not a pure bailout, and to the extent you think it is, you're misunderstanding it.
Assuming you believe the banking system needs federal intervention (I do), there are two ways to accomplish this in the current environment:
1) you take on all the bad assets (which need future writedowns) onto the federal balance sheet, thereby cleaning up the banks' balance sheets. The estimate amount of bad assets out there lies in the trillions.
2) you provide capital support for the banks you think are worth saving. in this scenario, you have the banks leave the assets on their books, and dispose of them at such time as they think appropriate. The cost of such a program would be in the billions, not trillions.
The reason the 2nd is cheaper by far than the first is because banks are leveraged. The value of the "bad assets" lies in the trillions. The amount of capital needed to be raised against said "bad assets" lies in the billions (because you only need about 10% capital).
I don't understand why you'd call this idea the stupidest ever. The criticisms you're levying apply about 10x more so to the Paulson idea.
Finally, just to answer some of your questions, the idea would basically be as a temporary bridge. Much like in the 30s (Read Jesse Jones's book "50 Billion Dollars" if you have time; he was the head of the RFC) and with Sweden's temporary exertion of control over its banks (http://www.nationaljournal.com/njmagazine/print_friendly.php?ID=ei_20080621_6513)
Once the banks were solvent, and recapitalized, the RFC sells its take. As such, it's not purely a bailout, since the govt shares in any upside. This is as opposed to the current Paulson proposal (being announced as I write this), which simply overpays for bad mortgage assets, probably to the tune of $1 trillion +.
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