The Bailout

[AaronJasper]

Do you guys think this is a good idea? Is it right to go into the private sector and buy all of the defaulted loans? Why should the taxpayers pay for all of the bad loans given out by all of the US banks? Watching GW talk on TV is just disgusting. He is about as clueless as Sarah Palin. He talks about restoring confidence. How can we be confdent that this mess will not happen again? All that we are giving these companies is a free pass. They will get greedy again and give out loans that they know will not be repaid. This sets a bad precedent.

Also, if they are going to raise our taxes to pay for this disaster then why do we get nothing back? in socialist economies where public money is used in the private sector the public gets things like insurance. So if we are going to give billions to AIG shouldn't we at least get insurance from them at some sort of a discount?

This all comes down to "you wash my hand, I wash yours" politics.

[FK]

Fact = who are the owners of these companies,,,,, we are,,, the stockholders are pension funds, 401K plans, union funds, state and city retirement funds. We cannot let the investment banks, insurance companies or local banks fail.

The US gov't has done this type of bailout twice in the past and the taxpayers have made a profit.

Chrysler Corp. was "bailed out" and the Savings and Loan banks were also, the gov't waited until the market improved and sold the stocks at a nice profit.

In todays situation we must do something or the economy will collapse into recession and millions of jobs be lost. Car dealers are already in trouble, manufacturing companies and business cannot get loans,,,,, the banks do not have cash to loan to keep businesses active. Last night in CT, we had a very large used car dealership go up in flames with all of their inventory in the building,,,,, wonder why?

Remember that this is a Dem. created mess,,,,, started with Clinton and his cronies. In 2001 the Bush administration went to congress and wanted to reign in Freddie and Fannie,,, they were told by the Dem,,, no problem. In 2003 the same story,,, not a problem. In 2005 Greenspan was very concerned and was told by congress to forget it,,,, McCain and two others sponsored a bill to limit the loans by Fannie and Freddie,,,,,, it was squashed in committee by the Dems. The CEO of Fannie was a Clinton cronnie and he cheated on the accounting and gave himself $1.3 Million annual bonus checks.

This is not a surprise to the government,,,,,, it has been coming for years and Congress did not want to face the public. Bush has very little to do with the problem,,,, it was given to him and the Congress ignored the reality for 7 years.

http://www.breitbart.tv/?p=184743

The companies also employ many tens of thousands of people who will loose their jobs if we do nothing. It is O'K to give a movie actor/actress $20M-$30M for a 90 min film,,,, a basketball or football player $3M-$4M a year to entertain us,,,,,, a CEO of a company with 20,000 to 60,000 people and Billions of dollars in assets is evil ?

The wealty do not burn their money in a fire,,,, they invest in stocks, bonds and purchase expensive items. This creats jobs by financing small businesses. If the Dems get in we will have them paying more taxes,,,,, the government will waste the money and investment banks cannot use that money to create new companies or invest in expansion of existing business.

Regards,
FK

[AaronJasper]

While I did say some negative things about GW, it's really not that hard to anyway, this was not an attack on a party but an attack on the way our country is run. Yes Bill Clinton passed bills to make mortgages easier to attain for unqulified people.

This is however, an attack on the basic principals of this country. We only step in where we see fit. There is much bias here. When the average person's business fails, they get nothing, they go into bankruptcy and are screwed for life. however, when you are a CEO of a large company you can mess up and run it into the ground effecting an entire country and walk away without any problems.

About the stock market, it is free enterprise at its best. It should not be run by the government. All the government is doing is buying the bad debt that the banks/lenders don't want. Do we the taxpayers want it?

When are we going to benefit from owning these companies being helped out? Are we going to directly profit from it? Are we going to get sevices for less from these companies, after all we the public will own a majority of a few major institutions. If we are going to pay for it like they do in Europe we should at least be entitled to receive thier services in return for paying for it. Would you agree?

This is like a bank ledning a bum in the street 10,000 dollars and the bum never pays it back. Then you come along and the bank says, "hey this bum promised to pay me 10,000, I will charge you 5,000 dollars for the promisary note for 10,000 dollars." Do you think it matters who the lender is? Are they going to pay it? Think about it.

[FK]

Yes, the federal gov't will pay 20%-30% of the face value for these caustic securities,,, like in the past the stock market will recover and the fed can sell back the MBS securities to the stock market. Possibly at a loss and possibly at a profit. The taxpayer will not give away $700B + and never see the money again.

We are not bailing out the top few CEO's who made poor decisions on their company investments. The entire country and the world are in serious trouble.

http://www.businessweek.com/magazine...s+%2B+analysis

I have discussed the banking system with a friend who is a senior VP for one of the countries largest banks. He stated the core problem was the Congress letting the banks sell their stocks on the open market, the drive was to make profits at any cost,,, the senior managers bonus plan depended upon selling product and making money. When the Federal gov't guaranteed the home loans with Fannie and Freddie the bankers created the MBS and gave loans to people how never could pay the basic monthly fees. Stupidity?? Irresponsible accounting? Yes, but the immediate problem is to recover from the mess we are in at the present time. The FBI is presently investigating 20-30 of the large Wall Street Companies who made this mess happen, many of the CEO's and Accountants will be in serious trouble.

The bail out is not the ideal solution however, we must act quickly and regain confidence in the economy.

Regards,
FK

[jovalle]

Nothing beats a fishing forum to weigh in on the credit crisis and the appropriateness of the "bailout" in its ability to solve the crisis, or more importantly if it is the correct means of addressing the crisis. I certainly appreciate Aaron's willingness to discuss the issue and as the Federalist papers highlighted, the most critical element to a properly functioning democracy is a well informed electorate.

To my mind, the first question when considering the appropriateness of the bailout is the country's tolerance for a "free market." While we tend to view the pursuit of capitalism and a free markets as central to our democracy, in reality the term "free market" is very much a euphemism for volatile markets and as a result of the experiences of our economy from the latter half of the 19th century and early 20th century (see the work of Keynes) we have adopted a modified form of capitalism that seeks to mitigate the volatility inherent in a truly free market through a mix of regulation and flexible monetary and fiscal policy. I have no problem with those that philosophically believe in unfettered free markets to distribute resources, but one must recognize that the adoption of such an economic regime will result in highly volatile boom-bust cycles of economic growth as well as an extreme concentration of capital (and wealth) in the hands of few.

Previous generations of Americans decided that unfettered capitalism was not in the best interest of the country and we have adopted an economic system where the federal government takes an active role in the economy to smooth economic growth for the benefit of all of its citizens. As fisherman, we are all aware of the conflicts inherent in capitalist distribution of our resources via the debates over water access in the West. Perhaps over-simplified, but if you are for a free market, then its OK for a billionaire to buy up a river and close it to public access. If you are for a modified form of capitalism, it is OK for a billionaire to buy up all the land they want, but they must allow some public access to the river that flows within it because that river constitutes a natural resource for which all of the country's citizens have some right to utilize. Lastly, if you are a socialist, you support the right of the government to appropriate that land from the billionaire, make it a public park, and tell people what to do on it, which generally will be to stick a bunch of cows on it along with a few state run plants that will inevitably leech tons of mercury into the water killing all of the beautiful fish within the river...but I digress.

A few thoughts on the specific situation:

The Bush administration has done itself a great disservice pitching this legislation as a "bailout." While the plan, in theory, will help the banking industry and broader economy survive a rough patch, the plan does not necessarily avert massive economic losses for the entities that purchased these mortgage securities. In reality, the plan should be recognized as a more appropriate reallocation of capital and risk from organizations which do not have the ability to hold these securities to the US government which can. Like the RTC in the S&L crisis, the plan is utilizing two central aspects of the federal government that enable it, and solely it, to address the problems inherent in the crisis. First, there is no time line on the Federal government's use of capital, which is to say if the government buys these securities, it can hold them to maturity avoiding the market-to-market volatility inherent in a market where valuations are governed more by emotion and liquidity than by a rational analysis of the probability of receiving promised cash flows from the underlying loans. Second, the plan is a form of capital arbitrage common to the market. This idea is central to why the bill is not a bailout. The $700 bln cost of the plan is not a current federal expenditure. In reality, the $700 bln cost will be met by the US Government issuing $700 bln in debt (this is no different than the additional $400 or so billion a year we must issue because of the deficit, only we as taxpayers get investments instead of financing a war or social security). Importantly, the Federal government can finance its debt at the lowest rates available in the market, say a 10 year loan costs about 4% give or take. On the other side of the equation, the assets the government buys should yield at a minimum 7%, but more likely 10%, 20%, or 30%. Thus, other things equal, the plan is profitable day one because the portfolio of investments will yield considerably more than the financing costs associated with purchasing that portfolio. So assuming the government buys the securities at a fair price (which is a massive assumption to say the least) and that the economy does not deteriorate significantly further so that the default rates on the loans do not materially increase (another massive assumption), we as taxpayers will make a handy profit on this investment/bailout. In theory, this should not result in an increase in taxes as there is no current outlay and critically, by freeing bank capital to lend, should grease the wheels of our economy once again, benefitting all taxpayers through economic growth as opposed to contraction.

A good question to ask at this point is why, if profits are so readily apparent, can the market not distribute capital efficiently so that private investors can take advantage of this opportunity? The answer lies in why we are in a crisis presently; everyone involved in the markets has thrown money at these investments and has been burned badly. This crisis has been present in capital markets since roughly February of 2007, and really started cooking in June of 2007. Since then rather large pools of capital ranging from hedge funds, private equity funds, highly leveraged investment banks, sovereign wealth funds, pension plans, etc have bought mortgage securities at discounts only to find that they bought too early and do not have sufficient risk tolerance to handle the mark to market volatility that has followed their acquisition. Moreover, leverage has exacerbated the volatility of the market. As the crisis has worsened, the transfer of assets has resulted in ownership generally transferring from unleveraged portfolios to highly leveraged pools of capital. The implication has been a lower tolerance for loss - a 1% loss on an unleveraged portfolio is tolerable, while a 1% loss on a 40 to 1 leveraged portfolio is a disastrous 40% loss on capital. Lastly, the restriction of credit availability, the ability of banks to obtain loans, has resulted in a forced withdrawal from markets and subsequent liquidation of portfolios. While investments may bear profits in the long run, as Keynes said, in the long run we are all dead. The benefit of the federal government is that unlike any participant in the market, its is able to operate over very long horizons and thus bear extreme volatility. Hopefully this helps to clarify why the government is really the only investor available to help mitigate some of the volatility inherent in the market. Again, if you philosophically believe in totally free markets and are willing to accept the extreme swings of economic activity that result from it, than you should be against the bailout. If you think the federal government should attempt to mitigate economic volatility, then the bailout makes sense.

If I still have you as a reader (sorry for the length of the post, but its a complicated subject...), allow me to switch over to address some attribution of blame. This crisis is wholly a result of deregulation and the leverage that resulted. Deregulation or more accurately no regulation allowed the mortgage industry to shift from the traditional channels of local banks originating loans to unregulated mortgage brokers. A lack of regulation of the "derivatives" market allowed the markets to assume unheard of levels of leverage which in turn resulted in market participants inappropriately assuming levels of risk in their investments which did not match the loss tolerance of their capital. Coincident with unheard of levels of leverage was a shift in markets to fairly esoteric statistical techniques that gauge risk which were inappropriately adopted industry wide by those who had little understanding of the mathematical assumptions. The failures of regulation can be squarely attributed to the banking and finance committees of Congress and the advice and consent of the executive via the Fed and the SEC. This lack of regulation and general deregulatory framework has been enacted in a period when the Republican party controlled Congress and Alan Greenspan ran the Fed.

The Bush administration missed a key opportunity to reform the housing market in 2003 & 2004 with the accounting scandals at Fannie and Freddie largely because it was unwilling to work with Congress to expand oversight responsibilities of OFEO rather than privatize the two agencies (which in hindsight would have been even more disastrous for the economy). Moreover, Chairman Greenspan, in testimony to the Congress, repeatedly advised against regulating the nascent mortgage market and applauded the financial innovations in securitization which lead to massive amounts of leverage in the system. Central to the crisis have been the decisions to exempt the swaps market from regulation by the CFTC, which enabled participants to assume leverage far in excess of that associated with more traditional instruments in the financial markets like futures, options and margin requirements in common stock accounts. Also central was the decision to not regulate the evolving mortgage industry with regards to the standards of origination revolving around creditworthiness and suitability of loans. The concept revolves around requiring loan officers at traditional banks to operate as fiduciaries where mortgage brokers are not required to act as fiduciaries. This lack of regulation transferred the judgement of loan suitability from the originator to the borrower. Given the complexity of mortgage loans, this transfer was entirely inappropriate as obviously homeowners are not sufficiently educated as to the complexity of loans they undertook nor was the market and final investors sufficiently educated as to the risk of the loans that they purchased. Prior to the '90s, most mortgage loans were originated by local banks which were highly regulated as to their ability to lend, as well as extremely well educated as to the condition of their local housing market and the ability of a loan applicant to afford a given loan. By transferring the mortgage business to brokers and the bond market, the government allowed a system whereby those that originated loans did not care if homeowners could pay their loans, after all they are paid only at the point of origination and not loan creation, and those that loaned the money did not have sufficient insight into the creditworthiness of borrowers.

Ironically, despite the pronouncements of the press and politicians, Fannie and Freddie really have little involvement in the cause of the problem the bailout specifically addresses. I hate to say it, but the public is done a disservice by relying on the press for insight into the financial markets. Put simply, the majority of the press are people who have been trained to be good writers and have little or no knowledge of the subjects they report. Would you trust an english major with a rudimentary knowledge of economics to manage your money? If you rely on the media to gain your understanding of the markets, that's pretty much what you are doing. Similarly, most politicians are lawyers not bankers. Finance has evolved so much in the past two decades that it is nearly impossible for even those that are well versed in the academic groundings of economics to understand the complexity of the markets. Someone who studied law is hopelessly clueless when it comes to understanding the securitization process of mortgages. As someone who has watched nearly every congressional hearing on the economy over the past ten years (i.e. every time the Fed chairman testifies before Congress), I have been embarrassed by the lack of elementary grasp of the markets by our Congressmen.

Fannie and Freddie have two lines of business: facilitating homeowner access to the mortgage market via pooling and guaranteeing qualified mortgage loans, and managing extraordinarily large portfolios of mortgage loans ostensibly to ensure liquid and stable secondary markets for US mortgage securities. The first aspect of their business, guaranteeing and pooling conventional loans that meet strict criteria of creditworthiness has absolutely nothing to do with the crisis and if anything has helped to limit this crisis to a very small segment of the mortgage market. A conventional loan originated by Fannie And Freddie is required to be of very high credit quality (FICO scores above 700 or so - meaning people who can easily afford a loan and have demonstrated that they can manage credit well) as well as capped at a specific loan size (recently around $400k, but raised to $700k in the past year). The second aspect of their business is far more controversial in that by managing extremely large portfolios of mortgage loans, the agencies are able to engage in financing arbitrage which amounts to a taxpayer subsidy of their profitability as private corporations. The agencies, by right of their implicit backing by the government, are able to borrow money at very low rates which is used to finance their massive portfolios. In effect, the majority of the agencies' profits are derived from a similar arbitrage which underlies the rationale for the bailout. Despite conventional wisdom, Fannie and Freddie did not issue the toxic (or "caustic") mortgage securities nor did those securities constitute much more than 10 or 15% of their portfolios. While the business practices of Fannie and Freddie are abhorrent, it is an entirely unrelated issue and to associate the with the credit crisis only distracts the issue. Ironically, had the Congress allowed the two agencies more involvement in the sub-prime market we most likely would not have had such a disaster as rather than allowing the unregulated mortgage brokers to control the sub-prime market, Fannie and Freddie would have required some measure of fiduciary oversight and loan standards to filter the lax lending standards.

Lastly, and to finally get to the crux of why the public and you guys, take issue with the bailout, is the question of whether or not the perpetrators of this mess are going to face sufficient penalty as to discourage this sort of thing from happening again. Put simply, these loans were originally purchased at 100. Hopefully if the bailout is passed, the government will buy these securities at prices well below 40. 60% losses, particularly on leveraged pools of capital ensures that there have been sufficient economic losses to cause pain. We as taxpayers have to know that the government, in purchasing these securities does not overpay, and that is a significant issue. Overpayment would amount to a bailout and you can be assured that everyone who currently owns these loans is very excited that the government is about to buy them and will ensure that they get the best price possible. Attaching provisions such as requiring warrants to be issued from sellers as well as providing oversight and employing informed managers to purchase the securities will help offset this risk. Sadly, as well all know, politics will diminish the utility we as taxpayers get from the bailout plan. The fact that $150 bln of tax expenditures have been attached to the Senate version of the bill is disgusting and symptomatic of the broken political process. For example, to appeal to members of the House who voted against the plan initially, the Senate has attached tax earmarks like the one which suspends the excise tax on wooden arrows produced for children solely to pander to specific Representatives who initially objected to the plan. This enables the Representatives to return to their districts for re-election and state that while they were against the bailout, at least they ensured local jobs stay in their district because they were able to secure these earmarks. Its a wonderful bit of legislative deception whereby the Senator who introduced the tax loophole does not face re-election for another four years and is thus immune to immediate political issues, can pander to the Representative that faces a tough re-election battle every two years and force them into passing tough legislation by providing a free lunch.

Ultimately, this whole debate revolves around one's philosophy of free markets. If you believe in unregulated markets, the rewards and losses associated with them and importantly the extraordinary volatility that results from them, than the bailout is bad. If you regard moderation of the business cycle as positive, than the bailout is a necessary evil that should be pursued in the most efficient manner possible. Personally, I believe quite a bit of blame lies in our schizophrenic nature on this central tenet. So long as the economy is booming and people are doing OK, deregulation and free markets seem like a good idea, but we rarely remember the true costs of a "free" market until we are in the midst of a crisis, enabling opportunist to skirt the rules and profit enormously when times are good while bearing the costs broadly as a nation when we decided the ramifications of an unregulated market are unpalatable.

Now if you excuse me, I have to tie off some BWO emergers so that I can land some of those pigs that broke me off over the past few weeks...hopefully if you've read this far, you don't think I'm completely insane.

[AaronJasper]

Vey good. It took a while to read it though I do have a problem with the government only stepping in when they see fit. Controlling the markets and deregulation should not be a subjective thing. For example they just can't deregulate when the economy is good and when it's bad they take things back and tighten it up. It has to be all or nothing in my opinion. I would favor a government controlled socialist policy if we actually did benefit from it. Time and time again we are seeing a greater need for goverment influence in what should be a free market. In fact they had to take out a big loan to try to keep it free.

[nutman]

this may have started in the clinton era ,but this is funny how people have just gone with this or been decived by it .The point here is that if I went to buy a house with nothing down ( you come to me ,with the brooklyn bridge for sale ?) Im thirty seven and know better ,but ive learned through trial and era .The people who should be punished are the morgage lenders !!!!!!!!!!!!! That is where this started .
I see both sides of the government courpt in this situation . Neither side put a stop to it years ago . It is the same things with the credit cards in this country . Why are we living of something for nothing ? Then when people cant pay they raise the intrest so high so people are stuck paying for the rest of thier lives to a credit company . That is where the government needs to step in .Whaty is holdiong the economy back is the large intrest rates that people can afford . Low the rates so people can pay their bills .Then when they have payed their bills they could afford to by more ,and limit the amount of credit that is avaliable to people . It is nuts what has been happening in this country .
Inform your children ,what is happening out there .They are being robbed by these companies .It isnt free enterprise ,it is calle d take from the poor .
Remember nothing is free in life !!!!!!!

[AaronJasper]

Well.... the bailout has passed and the market has been down everyday since. Today was the largest drop since 500 points. It's a shame that 700 billion dollars can't even help us now.

[Brookie]

hey - maybe you guys should post on FlyAddict or the Drake? I thought this was a fishing site?

OK Aaron - don't get your panties in a wad, I'm just busting stones.

Personally, I was never for the bailout. I don't see why the US taxpayer should have to bail out Wall St. for making risky loans. In a free market, if you take a risk and it backfires on you and it causes you to go out of business, then so be it. Oh, I forgot, we don't have a free market here anymore....

You know - something to think about - in the 1776 we had a revolution over less than this. We're an apathetic country and it makes you wonder what has to happen before people finally wake up. Sadly, it probably has to get a lot worse than this. If they were alive today, out founding fathers would be very sad men indeed to see to what extent this goverment has grown, and how it has it's tendrils in all of our pockets, as well as other aspects of the citizenry that it has no business being in.

You know, the constitution was a pretty brilliant document. Too bad nobody in congress or the even the executive branch respects it's principals.

[jovalle]

Good thoughts all around and I'll keep it brief this time, I hope, but a few points of clarification.

1. The beauty of our constitution, and why it has lasted so long, is that it is so flexible and open to interpretation (sorry to those that believe in Thomas-Scalia strict construction). It specifies principals of a good Federal government and rights of humanity, and little else. The principals of Federal government are more focused on how to divide power so that it does not corrupt (an issue when a party controls both the legislative and executive branch, as has occurred in the past eight years) as opposed to defining the extent of the Federal power. Moreover, the relative silence on the extent of Federal power, relative to state power, was very much a compromise to allow the adoption of the constitution as opposed to the articles of confederation, and we saw a fairly activist supreme court, composed of several founding fathers, very quickly appropriate greater power on behalf of the federal government at the begining of the 19th century. Also, there is nothing in it that specifies free market capitalism is the only economy for such a democracy, in fact I would guess quite a few founding fathers, principally Jefferson, would take great issue with modern capitalism. Last bit of history, check into the crisis of 1872, 1907, 1929, 1980s S&L...you'll be shocked at the similarity to the present day (particularly 1907), and you'll find that we have a longstanding tradition of intervention in the free markets.

2. I agree, punish the mortgage lenders! Only problem is they are tough to find! The problem was the market allowed traditional lenders to disappear (be they FNMA & FRE or S&Ls) and replaced them with a "shadow banking" system of mortgage brokers who originated the loans (without regard to anything other than increasing commissions), who then passed on the loans to investment banks that securitized the loans (who only cared about increasing commissions), who paid rating agencies to rubber stamp "AAA" credit ratings on the loans without doing due diligence (because they only wanted commissions), and the loans were finally bought by pension plans, mutual funds, global banks, etc, who trusted the rating agencies, investment banks, and mortgage brokers wholesale and never bother to check the quality of the loans (because all they cared about was making a little more money in their portfolios). So who do you punish? And also, it turns out everyone has been plenty punished in this whole mess. Also, what about all of those people who willingly signed up for loans they couldn't afford? What do you do with them? There is no easy answer, except to say that we need to do whatever we can to prevent a further run on banks, an escalation of unemployment, and eventual soup lines. The great depression really was a minor hiccup in capital markets that was inappropriately addressed by the Federal government which subsequently resulted in the wholesale contraction in the lending markets preventing local banks from lending to local people. For a good review of the causes of the great depression, see Ben Bernanke's life work, its fairly easy to find on google.