There's a plan afoot to screw the US taxpayer. It was proposed by the Treasury Secretary. He will attempt to ram it through Congress this week using scare tactics. The bottom line is this is the worst piece of legislation to come down the pike in a very long time. It should not be passed in present form.
Let me start with a point made by fellow econ blogger Mish:
It was only a month ago Paulson was reiterating to anyone who would listen how sound our banking system is. The fact of the matter is that neither Paulson nor Bernanke saw this coming, yet now Congress is supposed to trust they now "know" the solution.
Damn good point. In fact, everyone who is surprised by what happened over the last few weeks (which is damn well near everybody) should sit down and not even get involved in solving the current problem.
Here is a post that is currently up on my blog:
This is one of the worst bills to ever be proposed. Let's look at the primary problem:
If the Bush administration has its way, anyone harmed by the Treasury Department's handling of the $700 billion Wall Street bailout might have no remedy.
Draft legislation proposes sweeping powers for Treasury Secretary Henry Paulson to buy and sell mortgage-related securities however he sees fit. Aside from requiring periodic reports to Congress, the bill provides no oversight of the bailout's management -- and specifically bars any court or agency from reviewing it.
There is no mention of any accountability in this bill. Much like the problem that got us in this mess -- no oversight -- the exact same problem continues throughout the bailout.
Let's look at some other glaring problems:
Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets
Like -- what other kinds of assets? How about a car owned by the president of the IMF? That's an asset, isn't it? This is way too broad an authority to anybody.
Reporting. Within three months of the first asset purchases under the program, and semi-annually thereafter, Treasury will provide the appropriate Congressional committees with regular updates on the program.
So -- twice a year we get to hear how out tax dollars are spent. That will probably mean it will be accompanied by some report. But that's it. That's just not enough.
To qualify for the program, assets must have been originated or issued on or before September 17, 2008. Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.
Basically, the Treasury Secretary has the ability to determine anybody is eligible if be sees fit. It's hard to see Bernanke disagreeing on anything Paulson says.
The bottom line is this bill is replete with statements of "The Treasury Secretary's discretion". That's just not going to work when somebody wants $700 billion. That smacks of dictatorship and it should be avoided at all costs. Lack of oversight is what got us into this mess.
I would encourage you to please read what others have written. Every major econ blog has a post (usually two or more) on this very important bill.
And here is some more:
From the WSJ:
Valuing these assets will be one of the trickiest questions. For the plan to succeed, financial institutions must be able to get these assets off their books at a high enough price that their balance sheets aren't further pinched.
Treasury Secretary Henry Paulson pressed for Congress to act on the bailout plan, calling this a "humbling time" for the U.S.
The government is, in some respects, constrained in driving a hard bargain because the whole point of the program is to help banks get back on solid footing -- not to force them into deep write-downs, potentially exacerbating their pain. At the same time, the market turmoil has complicated efforts to determine the "real" value of the assets.
The mechanics of any sale are expected to be worked out between the asset managers and the Treasury. One option is a reverse auction. In that case, the Treasury could determine a type of asset it wants to buy (say, all AAA-rated mortgage-backed securities) and would then buy securities from financial institutions that offer to sell at the lowest price.
Congressional officials suggested the plan would create a rolling borrowing authority, with the $700 billion limit acting as a cap. That gives the bailout a potential value that's bigger than the entire annual Pentagon budget.
The proposal also calls for raising the public debt limit to $11.3 trillion. It would be the second time this year that ceiling has been lifted.
Treasury wants broad discretion in the program. If market conditions worsen, for instance, it wants flexibility to buy more or different assets.
Actually, valuing the assets isn't difficult. Everybody is saying in one way or another the market is valuing these assets improperly. The chaos is lowering the price, the uncertainty is lowering the price, the illiquidity is lowering the price etc.... Well, yes it is. All of those factors can effect the price. All of those factors are suppose to effect the price. Lack of trading in an asset makes it illiquid, and therefore less valuable. When the collateral backing a bond is experiencing increasing foreclosures, defaults and rising delinquencies the value of the bond goes down. Everyone is acting as though factors that correctly determine the value of assets in the market for some reason shouldn't apply to this situation. The bottom line is some of these assets (CDOs, CLOs, CMOSs etc...) are crap. The market should value them as crap. Simple.
It is not the government's responsibility to ensure none of these institutions fails. Some will. That's just part of the game right now. Institutions that own a ton of crap should pay for that decision. It's called responsibility.
I've written an awful lot about the national debt. There are several reasons for this, but the biggest is the debt issue indicates the US not willing to make hard choices. Over the course of the latest expansion, the US government was issuing over $500 billion dollars of net new debt per year since 2003. That indicates no one was saying, "we can't afford this." Instead, everyone was saying, "kick the problem down the road." This plan highlights how incredibly foolhardy that method of dealing with problems is. We're going to raise the debt ceiling again. What the hell -- what's a few more hundreds of billions of dollars.
This situation is approaching the unreal.
And finally, via CNBC, here is a list of all the spending we're suppose to be doing thanks to this plan.
From CNBC.
Here is a list of all the proposed programs proposed.
—Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.
—Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.
—The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.
—At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.
—Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac.The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie's at $798.2 billion.
—$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.
—At least $87 billion in repayments to JPMorgan Chase [JPM 47.05 --- UNCH (0) ] for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers [LEH 0.2151 --- UNCH (0) ]. Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.
—$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.
—$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.
—$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.
—$29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.
—At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.
Pretty really scary.