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Paulsons Frankenstein monster ,more like

And here's the next meme to make it's rounds on the internet -

If the US Treasury (and before too long the UK Treasury) is buying up all bad debt including credit card and car loans - where's the incentive to pay off your your credit card?

In fact, why not max it out now while you still can? - after all, we all know a depression is coming and once you default on payments, the issuing bank will just be able to sell it to the Treasury - the banks risk has gone. They will allow you keep spending, risk free for them.

Expect draconian changes in the credit laws coming to a legislature near you soon.

It doesnt really matter what mechanism is used it is a problem isnt it. If you have dragged a enormous lump of cash out of the future to make you wealthy in the present, which is all debt is, then whatever is done you remain poorer in the future. The bigger the debt the bigger the impact on the future. Poorer in the future means a suppressed economy, reduced international trade and a devaluing of the US, or any other country playing the same game. Dont know about the war on terror, and international war games, seems the that simply helped take the eye of the ball particularly with the countries so damn keen on it. Altogether too much saying the problem is never on the home patch and pointing elsewhere.

Robert,

Correct me please, if I am wrong, but I have seen no mention of the toxic US debt currently owned by foreign institutions (i.e.British Banks)

I gather the Polulson scheme will just rescue US Banks and leave the rest of the World's Banks who purchased US debt obligations (in good faith) to rot!

Will this not imply that for our Banks they will be doubly disadvantaged by this scheme?

First they will not be able to off-load the US debt related obligations that they hold and secondly they (our Banks) will have to compete with US Banks that have been freed from their toxic debt.

This scheme as it is currently envisaged is appalling for foreign institutions (non US) and we must press that our Government lobbies the US on this matter. If the Poulson scheme goes ahead it will destabilise the whole World and without doubt cause a gigantic economic crash the like of which we have never see before. (On the other hand doing nothing may do the same thing.)

As this State owned institution is buying assets bid to it, there is the possibility that in the medium to long term these assets could be worth more than is bid. Although the assets are toxic, many a finance company have made good profits from buying the written down loan books of other Finance companies and continued to extract money from the written off loans. It will be up to Paulson's new Bank to maximise these assets. The question is whether the State Bank is incentivised enough to continue to manage the assets to make a potential profit from them. Perhaps Robert you could clarify this for us?

Please Please Mervyn King, can we have a "bad bank" to put our negative equity in?
And please can we have another one to put all our credit cards in?
One law for the rich? Mr Peston.

I am surprised that this is still being presented as an international crisis rather than a USA/UK crisis. For sure there is rapid global price inflation as a consequence of rising food and oil prices but the credit crunch is largely a USA/UK problem caused by irresponsible sub-prime lending.

Although there has been some irresponsible lending in the UK it appears to be the case that the weakening of regulation and the failure by bankers and regulators alike to understand, or care, about the implications of buying repackaged toxic debt has created the credit crunch crisis. It was largely imported into the UK

Brown has been quick to call the banks irresponsible but he relaxed the regulatory framework and lauded their achievements – many ordinary people have been concerned by the easy credit made available to the young under Labour and their encouragement of the β€œlive now pay later culture” with credit cards and loan offers being pumped through the letter boxes of successive cohorts of 18 year olds.

Brown and the Labour Party have fuelled this irresponsible behaviour, and house price inflation. The dealers walk away leaving the addicts, and the rest of us, to pay the price; the banks will use the crunch, the one their foolishness created, to rebuild their profits at the expense of consumers and productive businesses.

If my memory serves me right it was Brown who preferred to stick with the USD and pushed ahead with dregulation.

How different would it have been if we had taken our chance to join the Euro zone?

"This would mean that commercial banks would bid to sell their assets to the Government, and the winning bid - and the clearing price for all bids - would be the lowest price put forward by the banks "

There must be more to it than this, otherwise what incentive is there for the banks to bid anything below par value? There must be a disincentive for overbidding surely, so what is it?

Lehman Brothers were apparently selling their assets at about 22cents in the dollar. I agree with you that that trherefore would seem to set a price, which therefore should be used to value assets retained by non-selling banks.

Just wait until next year because the cause of the great stock market crash of 1929 was the actions taken by the banks in 1928 during a series of minor falls. The money will all be gone and the people will not be happy.

People will look back in years to come and when they talk about 9/11 they will now be talking about 9/15. The day that capitalism died.

Nice legacy, whoever wins in November will have the repercussions of the 'Monster' looming over whatever they try to do during their administration.. I bet even some staunch Republicans are thinking " Hey, give the poison chalice to Obama, let him sup on that cup..".

I wonder if the Fed will demand a 'promise not to do it again' note from the banks, like the Japanese did in 2002? ..because that really worked.. NOT!

How long does the cycle of nationalised debt and privatised profit run before someone wises up?

PAAAs the pAAArsell



The banking equivalent of a colonic by pass Fed to suckour taxpayars via an inkontinence pouch acting as a DRIP .


Waste recycling at its best

Bankerrs now have an opportunity to strait flush their Strategicaly Hyped Investment Tranches all over the taxpayers pension pot


No im not making it up, ask Paulson

A lot of the cdo mortgages are undervalued at present. In the last housing bubble in us and uk, prices dipped low. Ten years later most had recovered,twent years on form last us bubble, everyone wishes they had bought. It will be same here everyone will say property was so cheap.

Oh boy! The term "unholy mess" keeps flashing up in my mind. There seems to be an underlying, unpsoken, arrant nonsense-cum-disaster in all of this. The citizens of the US, Europe and the UK (perhaps more "developed" countries) are going to pay heavily for this in both economic and social terms. The mind boggles at the extent to which we're now laying the rails for an economic downward spiral that will make the Kingda Ka Roller Coaster ride (that's the one with the biggest, fastest, scariest drop in the world) feel like a drive out with your grandad. Is it just me (I'm a layman, btw, not an economist or a trader or a politician or anything like that ... ) or is all this pointing us towards Armageddon? Can somebody give it to me straight please?

And with all this money there is not one mention of how the credit derivative contracts will be handled which are the true problem concentrated in the US. As an American, I feel this hands far too much money and authority to one person. But with all the additions others want to add to the proposal, it will be interesting to see if it gets passed at all.

If you don't understand what is going on with credit derivatives, here is an credit derivative primer article:

As mentioned in an earlier comment, there is the possiblility of the new entity significantly minimizing risk, and possibly profiting, by virtue of acquiring the assets at a discount.

It seems what's needed before passing judgment are the details: are there minimum discount percentages the new entity will adhear to? At what point will a performing loan (for those that do turn around and perform) be sold, and will there be oversight to ensure these assets are sold for top dollar?

Agreed, at first blush the sheer magnitude of the event is alarming. With greater communication from Paulson, however, we might find that the taxpayers are actually the ones poised to take advantage of a bad situation. That would be nice for a change.

Privatizing profits and socializing failures.

It's the American way, I suppose.

A bit less than two million people go bankrupt in the US each year because of medical expenses.

Where are the government bail-outs for these unfortunate folk?

Oh, I forgot - - that would be socialized medical care, and we can't have that, can we?!

Robert,

Has credit card debt been securitised as well, we haven't heard anything about that yet and there is plenty of that in the UK.
Is that the next elephant in the room; or should I say bank vaults?

Mr Peston,
The "bad bank" is the greatest invention since the wheel.
All the debts and losses of the rich go into a "bad bank".
The poor? Hard luck, pay up!
What a brilliant idea.

According to press comments George Bush had "no idea how bad things were". Interesting that he admitted to this and also not very consoling if this GSGC (Government Sponsored Garbage Can) doesn't work out

What a clever idea.

In previous downturns all the vultures of the property world have snapped up the homes of those unfortunate souls who can’t afford to keep up the mortgage repayments.

If the Fed sits back and waits for the market to rise again, they will make all the gains at the expense of the vultures.

In ancient times the perpetrators of this mess would have met an exquisitely painful end in the local ampitheatre. However we need a postmodern ironist solution suitable for our own era:

Let's call it Paulson's Den - the squirming simpering contestents ( bankers ) have to present their laughably pathetic inventions (subprime mortgages, securitised loans, leveraged buyouts etc. ) to a panel of mocking and derisive judges ( the Fed).

After the judges have reduced the contestants to the level of soiling their own undergarments in fear, they then offer them a meagre amount of capital in exchange for an eyewatering slice of the supplicants equity.

All TV rights go to the public purse. Should make prime time viewing ?

I think that the acid test of any government bail out should be: will the taxpayer benefit in the long run?

Any bail out should, in effect, be a loan which has to be paid back with interest when the banks get back on their feet.

This would have the effect of socializing some of the banks' profits and privatizing their losses. It would also encourage bankers to behave more responsibly.

14. At 2:29pm on 21 Sep 2008, thowze wrote:

And with all this money there is not one mention of how the credit derivative contracts will be handled which are the true problem concentrated in the US. As an American, I feel this hands far too much money and authority to one person. But with all the additions others want to add to the proposal, it will be interesting to see if it gets passed at all.

If you don't understand what is going on with credit derivatives, here is an credit derivative primer article:




That's a really interesting article. Thanks for posting the link.

It was interesting to hear one of the old school saying the other night how the US invented globalisation and now it is out of control no one knows how to handle it.
The amount of money involved is enough to blow anyone's mind so I wonder how many of them will come out of this keeping their sanity.

What else would you expect from Hank!

He joined Goldman Sachs in 1974, working in the firm's Chicago office. He became a partner in 1982. From 1983 until 1988, Paulson led the Investment Banking group for the Midwest Region, and became managing partner of the Chicago office in 1988. From 1990 to November 1994, he was co-head of Investment Banking, then, Chief Operating Officer from December 1994 to June 1998; eventually succeeding Jon Corzine (now Governor of New Jersey) as its chief executive. His compensation package, according to reports, was US$37 million in 2005, and US$16.4 million projected for 2006.[8] His net worth has been estimated at over $700 million.

#4 21 Sep 2008, 11.24pm,

Reuters is reporting that Paulson has said today on ABC television's "This Week with George Stephanopolous" that "foreign banks will be able to unload bad financial assets under a $700 billion U.S. proposal aimed at restoring order during a devastating financial crisis"

This news is not going down well on the Democratic Underground Forum. The participants there see US tax dollars "bailing out the whole world" and Bush's rich "foreign friends", without congressional or court scrutiny, when the US government should be looking after the well-being of its own citizens. In fact, this could unite Republicans and Democrats - some have already written to their Congressmen demanding that the Senate call for supervision and scrutiny - and some say that it could cause a run on American banks next week.

"if the selling price of these impaired assets was determined by what the most stressed banks would accept, that could force all banks into further writedowns"

Er... a bit like any market then. If the less distressed banks feel that others are selling the assets cheap, why don't they buy some? Again, like short selling.. nothing like a bit of liquidity to discover the true value of assets.

19. At 3:26pm on 21 Sep 2008, morph366 wrote:
According to press comments George Bush had "no idea how bad things were". Interesting that he admitted to this and also not very consoling if this GSGC (Government Sponsored Garbage Can) doesn't work out

The press comments were wrong.

"To his credit, Bush accurately foresaw the danger posed by Freddie Mac and Fannie Mae, and began calling as early as 2002 for greater regulation of the mortgage giants. But experts say the administration could have done even more to curb excesses in the housing market, and much more to police Wall Street, which transmitted those problems around the world."

This comes from an article in the International Herald Tribune - here's the link:

The reverse auction idea seems to be a good (if obvious) one. Of course, if the new fund is taking the mortgages offered at the greatest discount, it will get the most toxic ones, but then that is the general idea.

Limiting the offer to firms with 'significant' US operations is probably about as restrictive as the administration can get away with under the circumstances.

I do not think that the same principle has any implications for credit card debt, where bad loans are likely to be of a far lower order of magnitude, and insufficient to cause systemic damage.

Does this new scheme favour the most improvident? Inevitably. As my uncle, a bank manager, used to say: " if you owe the bank a million pounds, you have a problem. If you owe the bank a billion, it has".

Very good article however I think that the eventual outcome will be the same as happened in the USA in the 1930s. That outcome was a full scale banking moratoriums that began in individual states , the first being Nevada ( Nevada also has the worst real estate problems today in the US!) and spread across the country.
The big problem with the debt situation facing the world is that the total amount of bad debt is not static but dynamic so what was 700billion yesterday could be 5trillion in 2 years for example. Shutting all the banks across large parts of the world will I fear be the final outcome as it has been on other occasions in history.
This going to take many months and with the creation of Lloyds- Hbos we in the UK have a monster that is now to large to save not to large to fail.

Naomi Klein's book, Shock Doctrine (about "'disaster capitalism' – the rapid-fire corporate reengineering of societies still reeling from shock"), has been invoked so often recently on so many fora that I may now have to buy a copy and read it. By way of innoculating myself against being one of the exploited in the immediate future.

30:

Very good point about debt escalating. I think we need to trace this back to its source - the mis-match between property values and the loans "secured" against them.

If so, then two steps are needed. First, we need to know when the housing market has reached a floor. My guess would be that the US housing market is nearing bottom dollar, but that the UK housing market still has a lot further to fall.

Second, and as a matter of urgency, we need to introduce new regulations preventing unrealistic lending in the future. This means regulations governing mortgages-to-earnings and loans-to-value.

This situation may or may not lead to nationalisation of the banking system - we are not too far off that anyway, after Fanny and Freddie - but it seems certain to lead to the reintroduction of credit controls.

I don't think Gordon Brown should follow the US on this one. I think Gordon should drive a harder bargain for the taxpayer. If the UK government buys some risky assets they should buy them on the cheap as in any distressed debt market. In addition, if the UK government is going to help recapitalise our banks they should get a good equity stake, as was the case when Citibank dealt with a Sovereign Wealth Fund earlier in the year. If we do this, I think we should decide how much the UK government is in for and then Brown should offer for the UK government to underwrite the necessary rights issues for the UK banks to that extent, so at least if the shares are not taken up and the UK government has to shore this up the UK taxpayer has some equity protection.

Friendlycard

I think that credit will be a good measure for the future but it will not help this current situation.
The big problem is the debt criss is appearing in more and more areas not just real estate . I also think that the US is closer to reaching the bottom but it still has a away to go yet. We must remember that the huge numbers of people who are going to loose their jobs have not yet hit the property market.
I am watching for a very serious decline in the equity markets this autumn as a signal for further banking problems ahead.
The UK banking industry now being concentrated in a few big players is an accident waiting to happen. As I said earlier they will be too big too save not too big to fail.

The hysterical tone of many of the comments to this and previous articles gives a clear insight into the political pressures Paulson will face. I suspect the markets tomorrow will look at the noises made by Congressmen and conclude that, despite the obvious urgency, this is not going to be done easily. This is not about bailing out fat cats, it's about preserving the core activities of the financial system which is fundamental to the workings of a modern economy. Assisting homeowners who have borrowed too much against depreciating assets is a separate problem, and if this initiative gets dragged into that as well then it will get bogged down. Will it take another week like the one we have just had to prevent this happening? The fear must be that a repeat would be even worse.

Looking at most of the valuation which can be done on these distressed securities suggests that the market price to which many have been booked already discounts a much worse outcome than is at all likely. That's the conclusion the Bank of England came to. So acting as a buyer of last resort on the basis proposed is likely to leave the US taxpayer with a decent profit. And it will not take much stability before the loan Hank Paulson has extended to AIG can be syndicated - 850bp over Libor and warrants on 80% of AIG sounds rather good.

Robert was right yesterday. Provided Paulson can steer his proposals through Congress, there is a chance that a credit driven deflation of a magnitude not sen since the 1930s can be avoided. There will be a grey period in which credit is more expensive and more difficult to come by and this will dampen all economic activity. But it won't be too long before the politicians start trying to make mortgages more affordable again.

For what it is worth, the fault in all this lies in all of us. Economic stability reduces risk and the returns associated with it. So financial systems behave like drivers of cars with ABS; the system is supposed to make the car safer, but all it does is to encourage people to drive faster.

34 Mart666:

I quite agree. My personal view is that there could be a really big downwards lurch in equity markets at the end of September or the beginning of October. Strangely or not, I think the shock may come from some unexpected direction.

You are quite right about the likely effect of rising unemployment on the housing market. In the UK, that will be self-reinforcing, a vicious circle because of how many sectors of the economy are housing-related - builders, estate agents, solicitors, electricians, plumbers, altogether representing a big area of economic exposure.

Is this is the end of the latest worldwide experiment in fiscal management. The previous experiment in the twentieth century of managed, state intervention of various shades failed and was rightly kicked into touch by Margaret Thatcher and Kieth Joseph in the seventies. In her wisdom she introduced the BIG BANG with uncontrolled unregulated laisez faire red blooded capitalism. Mrs T's blind faith in the future responsible behaviour of banks and borrowers appears to have been misplaced.
Where do we go from here?

Bring back a global system of Exchange Controls Regulation which existed in the UK until the 1987 Thatcher goverment. This could be co-ordinated via the US and the EU. This total free market movement of cash is unsustainable.

If you really want to see one of the causes of the banking collapses in the late 20s and 30s look up the history of an Austrian Bank which went by the name of Credit Anstalt. The same mistakes are being made again. We will pay for this next year, and if you think China will be immune then just watch, some people never learn.

What is that Shakespear said 'money makes us all pimps and whores'. Good old Will.

And the macroeconomic impact of issuing another 700bn of debt? Does the market want it? Who will buy it and at what price? Is the base lending rate staying at 2%? We will see a new surge of inflation in the US and further deterioration in the dollar exchange rate and it will become more and more difficult for the US to finance its current account deficit. The dollar price of vital commodity inputs will surge, pushing the US into recession. We will see an accelerated flight from holding dollar-denominated assets and a further loss of external competitiveness in Europe as the euro takes on an increasingly important role as a reserve currency. The inflexibility of European labor markets coupled with the distress of recession will feed populist and left-wing politicians who will deepen the problems. Seems to me there is no light on the horizon for a long long time to come. However, this is also a time of opportunity and the bold can set out a path that will reshape their economies and profit from the change in financial geoeconomics. My bet is it won't be the UK that leads the pack this time round, mainly because I don't see any leadership, or prospect of leadership.

Mr Paulson's proposal is not innovative. The Jamaican Goverment was faced with a similar banking crisis in the late 90s and formed a government entity to take over their debts and associated security.

Any economists wanting a model to understand the mechanics would do well to study this.

I agree with 38, that woman and her acolytes - including Blair.

#26 stormy-petrel

"Foreign banks can use US rescue plan"

I agree with you and I do not think Paulson has very much chance of getting Congress to agree to use US taxpayers dollars to rescue foreign banks - but it is reassuring that the subject is now being talked about.

So this brings me back to what were the UK market makers thing about on Friday? And what will be their reaction on Monday now that they have had a chance to think through the Poulson proposals.

When I blogged at 1.24pm UK BST about this problem it was 8.24 am EDT some two hours fifteen minutes before the Reuters story of Poulson making his announcement (gaff?). It is nice to be early. Perhaps I should thank Mr Poluson for answering my question!

The is a terrifying and possibly disastrous mess!

#28 TA Griffin

Exchange Control

I can't see how the World's hot money can be controlled except by Exchange Control - so like you I would like to see it reinstated, or at least seriously threatened.

However, the idea really frightens me as I am not fully able to understand the consequences and it could be even more disastrous.

For those of your too young to remember Exchange Control - Money moves between countries only in settlement of trade in goods. This will decimate the City.

(Decimate: not in the strict Roman sense of killing every tenth legionary - but in the more popular sense of leaving one legionary alive and slaughtering nine.)

#26 - stormy-petrel

Perhaps if Lehmans had not 'liberated' 8 billion USD of their European assets on Friday leaving Price Waterhouse Coopers with nothing to pay the wages, I would have some sympathy. If they can sink that low, they bl***y well should bail European investors out too.

Just to be clear I have no links to the UK Treasury whatsoever, I am simply a concerned taxpayer.

I agree that the financial system must be preserved and that the UK/US governments' should absolutely stand behind our banks.

But I am anxious to ensure that Gordon Brown does not spend billions of pounds on almost worthless assets. If our banks have failed and this is a capital injection of last resort then any debt should be bought low and any cash injection should result in a fair share of the equity.

Sovereign Wealth Funds from the Middle East and China drive hard bargains, and so should the UK government.

The problem with solutions such as this are that they are reactive and not proactive.

I've tried really hard to understand and empathise, and even sympathise, with the financial community but due to my lack of in-depth knowledge of financial markets - I can't.

Ultimately I come back to the question; why can't these banks and insurance houses fail (we hear a great deal about how these organisations are too big to fail)?

Surely the absolute function of a true market economy is supply and demand? And because during recent years we have had an artificially stimulated supply and demand, surely what we all need is a real correction?

This may be harsh for some, or even all, of us for a while but isn't it better to have an economy with a real chance to recover and prosper rather than an economy saddled with debt for years and years?

Yes 47, we could let the market decide, but the market might decide to dump millions of us on to the dole, while continuing to make the rich ever richer and the rest of us can go to hell. That is how our wonderful system works. What is the point of that? We need a new system.

The funny thing is, that this is - or should be - a non problem. It's all about moving money around, it isn't as if anything physical has actually been lost, after all.

It's all like one big game, somehow everything has been thrown out-of-kilter, yet everyone is still playing to their own ridiculously abstract rules to keep it on balance.

Mr. Peston:

1. Would you do us a favor, and provide a link to the actual bill that Treasury will put before Congress. I've read what purports to be a version of it, but don't know the provenance of what I read. It would be most helpful to us all.

2. If this is to be done as a 'reverse auction', there is nothing that precludes the banks from colluding one with the other, and Treasury could wind up with a winning bid of .85 to the dollar on paper worth perhaps .10 to the dollar.

3. If what I have read is accurate, this bill is blatantly unconstitutional. It makes the Secretary of the Treasury a virtual dictator over the economy of the US, and by inference much of the world, for at least the next two years! What's the adage about 'Power corrupts, and absolute power....'?

4. Also, if I understand correctly, litigation over the decisions of the Fed is forbidden!
What recourse will anyone have, anywhere?

I never dreamed that as an American, I would see this day arrive. I'm in contact with my Senators, urging them to oppose this madness. I urge all my fellow US citizens to do likewise.

#50 OldSouth

1. What chance do you give that Congress will approve the legislation if it fails to address the need of real people (with home loans) and simply saves the Banks?

2. Do you think Congress will like legislation that will allow foreign banks to get US taxpayers money in an election year?

3. How can a democratic (small D) institution take massive sum of money from the taxpayers and give it to a very few very rich bankers?

Found the link with a draft of the plan, courtesy of the New York Times:



Heaven help us if the Federal Government is handed this authority!

I suspect this monster is just the beginning of very spooky times. It incites about the same level of trust in me as the entire nuclear arsenal of the same country.

I have spent this last week in NYC and have the following observations.

This crisis of confidence has happened as a direct result of a willful and systemic failure by the US and UK Governments to effectively regulate and closely monitor the activities of bankers, lenders, 'hedgies', insurers and other market players.

All of these were playing high-stakes poker with the financial system but without adequate oversight, transparency or supervision.

The US Bush and UK Labour administrations' apparently 'magical' belief that the market, with its invisible hand, works best when left alone to self-regulate and self-correct has now been shown to be a complete delusion.

In the modern era, the 'invisible hand' clearly needs to be shown because this is not a poker game.

This proposed Paulson bailout is the first step on a long road, that amongst other things, must bring the 'ratings' agencies under a genuinely independent regime.

Furthermore, in the future, funds must be ring-fenced such that 'cross-contamination' cannot occur and which would also allow investors to precisely calibrate the risk of the investment.

PS. Thanks to the Robert Peston and NYT for insightful comment.

PPS. Right now the US Treasury has about 400 billion dollars left in the kitty, which is about half of what it held a few months ago. They cannot take many more big hits.

#51: John, I hope you are correct, and that Congress will not let it be steam-rolled into this madness.

#54: JohnConstable, very insightful. I am a strong proponent of free markets. That being said, these markets only function if the participants have some sort of sane ethical core values guiding their behaviour.
When we operate in an amoral universe, disaster lurks, and in this case, pounces upon us. I've worked with the amoral in business, and they produce only chaos as they skim the cash from the enterprise.

If the only ethic is 'He who dies with the most toys wins', then we have nihilists at the helm of the financial system, and I fear we will have to regulate. Hopefully, we won't have nihilists writing and enforcing the regs!

By contrast, let me offer the account of a different sort of bank, which built branches in small towns in Kentucky. Upon erecting the building, the bank would plant an orchard of apple trees on the grounds. This signified that they intended to stay for the long term, and was a physical testimony to the value of thrift and patience. And, if anyone needed apples to can in the fall (as many of the less wealthy did), they were welcome to pick from the bank's orchard. Thrift, patience, generosity, community.

The bank thrived, and so did the towns.

Anyone out there willing to try this approach again?

Can you please create an audio blog of the same comments from here on wards? That will be useful. Listening would be very fast than reading.

Thank you
Ravi Shankar

Its Monday morning and Londons about to open.
Any bets on Friday being a world record dead cat bounce?

Actually this idea will probably work.

It does not bail out the rich, as the Bonds are being reduced in value, the sellers of the bonds will make a loss on them.

In general terms this should enable the re opening of the money markets.

This will benefit anyone who has a job, probably preventing what could otherwise be a huge rise in unemployment.

This will benefit anyone who owns a house, and by enabling house building to begin to resume, will enable those who cannot find a house.

Mortgages will become more available as well.

This could be a very good plan, as long as the regulations are set in place to restore sound working practices to the US mortgage market (brokers and intermediaries especially).

Perhaps USA is finally on the home strait.

The problem with the proposal is that it is simply too much of a carte blanche for Paulson to do what he wants, and there is neither sufficient control nor a sufficient corrective to prevent this happening again. It needs some changes:

1. Clause 8 giving Paulson unrestricted freedom of action and placing him beyond oversight and legal review must be struck down. It is, I suspect, unconstitutional: all people must be required to act within the law or face due penalty.
2. The kinds of financial instruments the government can buy must be specified otherwise all sorts of other liabilities could be dumped as well.
3. The government must only buy 'toxic debts' held as of 15 September or before. There must be no leeway for banks to buy toxic debts and then bundle them on for the government to buy. That would line the pockets of the banks at the expense of the taxpayer.
4. The sum of 700 billion should be divided into two tranches: 250 billion now, and 450 billion by 31 January subject to the approval of the new congress and an interim report by the Treasury and Audit Office. This may make the resolution of these problems slower, but it will also make matters safer.
5. There must be a proper oversight committee with independent representatives.

In return for being bailed out, the banks must agree to certain consequences as a condition for assistance.

6. All executive stock options must be cancelled and the further issuance of them as part of executive remuneration should be forbidden for the next five years.
7. The government should be issued with stock options equivalent to the size of the debts bought that can then be either sold on or exercised if need be.
8. There must be at least one government appointed director on the board for the next ten years.

Finally, two other immediate consequences:

9. It should be made illegal for any publicly listed company to pay bonuses or issue stock options if they (a) make a loss; (b) become insolvent; or (c) make more than 5% of the staff redundant in a corporate restructuring. This should be made to cover Lehman Brothers.
10. The expiry date for the Bush tax cuts should be brought forward from 2010 to 1 October, at least for the top rate of tax; and the tax breaks for the oil companies abolished. This has to be paid for and not just by debt. If Bush is put in the position of having to choose between saving the banks, or saving his tax cuts for the rich and the oil companies, so be it.

I'm sure that the rednecks of Congress will refuse to vote for any measure to "bail out the foreign owned debts". This will probably result in the Chinese demanding that Wal-mart and its ilk pay cash for their goods while they pay the Americans with their tons of Fanny Mae and Freddie Mac debts in exchange for their goods (Boeing, for instance) !!

Alternatively, they can dump all US$ denominated debts into the already over-flooded market and watch the US$ go through the floor. After all, they will lose nothing is dumping debts made worthless by broken US promises to repay those debts. The Japanese, with their already not too good economy, will follow in a twinkle of an eye and the rest of East Asia and the oil-rich states will also not want to miss this boat. This will then keep the Feds gainfully employed as they scramble around, like headless chickens, looking for enough hard cash to shore up the US$ exchange rate.

In time to come, we may find Mexicans complaining bitterly about illegal "Yanqui" immigrants !!

Furthermore, we've heard very little from Warren Buffet lately. Perhaps he is too much of an old-style gentleman to gloat over the misfortunes of those who thought he was a senile old goat and are now caught out in their cleverness !!

State control of finance with no apeal and no recourse to judicial review is surely the definition of fascism.

Nr 31; Storm-petrel:
Before you invest in Naomi Klein's "Shock Doctrine", lay hands on "Wall Street versus America" by Gary Weiss first. It's more to the point, a good read, enlightening and - in my case - saved me from bad investments by making me think trice.

The US banks obtained cheap money when the Fed rates were between 1-1.75% over four years. The oversupply of cheap money caused them to offer initial discounts of up to 50% for the first 1-3 years and then claw it back over the following years. So (this could be a exaggeration) a 13% mortgage rate reflecting the credit statues of a sub-prime person could be offered at 6.5% a year for 3 years and then the rates would climb not only to the 13% but also recouping the discount over the following years. If the deals were mabe as a variable rate plus the charge for the poor credit, Fed rates went by 300% in 9 months therefater.

The US authorities sould have regulated better and the Fed should have indemnified the sub-prime mortgages temporarily and took on these exposures of banks when the problems started to arise. It would have been cheaper and the impact less severe.

The Savings and Loans problems in the 80s cost the US $160bn and it took the US 3 years to recover. this one is going to cost more than $700bn and the US has already a high amount of debt floating around the world such that its interest payments per day are going to be enormous. If it goes into recession, it needs some way to earn income to pay this and keep people's mind off this hardship, including the probale erosion of the subsidies it internally grants its economy.

I note that Paulsons proposals include, buying both residential and commercial property motgaged backed securities ? Given that the credit crunch was suppossed to have been the result purely of irresponsible mortgage providers selling mortages to those that could not afford them, why are commercial property asset classes also included in Paulsons proposals. A look at Lehmans quarterly statements show that their assets were much greater in commercial property mortgage backed securities. It seems to me that the sub prime problem is being used to cover up / smoke screen other problems in the banking sector? Can we have a proper analysis of the situation please

In appearance, society lives through a global financial crisis. Beyond this appearance lies the question..what 'exactly' is money'?. And, what is happening to money / capital in OUR society, Capitalist society?
Inquiring among acquaintances, you will find as many answers to the questions as you have acquaintances. As it is precisely 'what money is' that is dying, it is no understatement that the future of our species requires that all come to awareness of 'exactly, what money is. Meantime, humanity moves into a dark period.

If Paulson put a jolly roger hat on his head and a darling on his shoulder he would look the part and being tall like Gulliver he would be able to tow the invading AAArmAAAdAAAas of pyratical banks into the federal reserve for a smorgansborg , whilst shouting "Get out of my way before you are crunched"


This is all tooth fairy economics mixed up with Disneyland and it makes Grimm reading

Paulson fairys will of course tell the tooth the whole tooth and nothing but the tooth that it can have its bridgeing loan just to avoid the pillow fight which might let his feathered friends down and out of the bag


Waddingtons should take over the federal reserve and give the banks Noddy money[promicing to pay the bearerr a thousand laughs] until they grow up ,which of course will not happen in their never never land .

When will the ratings agencies be brought to book for passing the dodgy Bonds as clean?

#67 - When idiots stop believing that they can actually give you a rating that you can rely on !! Since they rated the US economy in the high A+s despite being $ trillions in debt to the rest of the world, one should have been aware that one is on a very steep slope, well greased with good intentions !!

Now watch commodities soar and the dollar tank as the madness unleashed by Paulson et al. does its damage.

Oil to hit $200/barrel by the end of the year, if not the end of October.

It has been said over the radio andTV a number of times that the alternative to bailing out these failing banks is too awful to talk about (or words to that effect). What is this alternative taht can not be lalked about? Is it civil disorder? Lynch mobs and gangs of arsonists or something like that or just the collapse of more pension funds?

Who wants to join me living in the United Soviet States of America?

(#67) "When will the ratings agencies be brought to book for passing the dodgy Bonds as clean?"

Liberal-Democracy is laisez-faire (anarchistic). Nobody can be brought to book unless the law proscribes what they do.

That's freedom. That's criminality (albeit only theoretically/morally).

Keep voting for anarchism (you know it makes no sense but don't know any better).

any relation hank and john?

Hey Robert,

I suspect recent downfalls on Wall Street are signal to a collapse in Empire America Incorporated. Hopefully, the American Congress will disallow an encore by heavily regulating the Federal Reserve’s pitch for a $700 billion bailout towards American banks.

More of my thoughts follow at:

To provide some degree of protection for the US taxpayer from potentially calamitous losses on the so-called 'toxic assets' surely the banks wishing to sell them to the government should be required to provide a transparent valuation of what they are hoping to sell?

Given the current problem is clearly a function of a) uninformed accounting and b) the relaxation of the debt-to-net capital ratio that was effected by the SEC in 2004, permitting 6 institutions to move from 12-1 to 30-1 or more (hence 'bulge' bracket), a capital adequacy ratio that can be adjusted to suit prevailing circumstances might be quite sensible too! It might well prove to be a less blunt instrument than setting Bank Rate?

The financial system will tend to outstrip the regulators simply because they have greater personal financial incentive to do so - it must therefore be incumbent on the regulators to better equip themselves to react with the ebb and flow of the market.