$700 Billion Bailout: Power Grab By the Treasury?
September 24, 2008 by Miranda Marquit
Filed under Finance
It’s a good thing that members of Congress are slowing the passage of the $700 billion bailout. (Dems want to add provisions to help “regular” folk, and conservative GOP types think the bailout is downright irresponsible.) The reason why is simple: This proposal, as submitted by the Treasury Department, is scary.
Yes, scary.
I’ve read on both Taxgirl and at My Two Dollars that the language of the proposal does not allow for any oversight of the Secretary of the Treasury as he doles out taxpayer funds to help save Wall Street firms. Here are some of the basics of what this proposal would do if passed as-is:
- Advisers from Wall Street retained to decide who gets what. Huh? Let the architects of this mess figure out how to fix it? Really, I think it just means they get to figure out how to best enrich themselves.
- No limits for executive compensation. See my outrage for #1.
- No equity share for the government. I’m sorry. If the government is going to bail these guys out, there should be at least some sort of way for the government to recover something.
- Decisions not reviewable. So one guy gets the final say. That sounds mighty like a dictatorship. Congress needs to do its job on this one.
- Protections from lawsuits. Everyone involved cannot be held accountable for the results of the outcomes from whatever action is taken. Sounds like what is happening now. Great risks taken, but accountability is limited and the losses are socialized and spread amongst even the innocent.
This falls under the heading of Really, Really Bad Idea. And I feel it necessary to remind everyone of what happened the last two times Congress abdicated its responsibilities and authorized sweeping powers for the executive branch: We got the USA PATRIOT Act (which is anything but) and the Iraq War (a huge deficit-maker itself).
This makes the current satire email playing on the classic “money wire” scam downright relevant right now. Go read a version of it at the Angry Bear.
And then contact your representatives in Congress. Because the $700 billion bailout should not be railroaded through as is.
In part I agree, and of course in part I disagree.
First and foremost, let us get one thing straight. This is not a “bailout” in the traditional sense of the word. This money is being used to setup a fund for distressed assets. These assets will be bought at “fire sale” prices and held to maturity by the government which will yield “Maturity” prices, which are substantially higher. NO MONEY WILL BE LOST BY THE TAXPAYERS OVER THE LONG TERM. It will end up much like the Chrysler bailout, which in fact was a bailout, where the US Government actually made money.
In regards to #1, you are correct in the sense that it is possible that the same Investment Bankers that securitized these mortgage assets, maybe involved in the purchase and subsequent unwinding of these assets.
#2 is a slippery slope. If you start legislating/regulating executive compensation, then there is just cause to do the same for all other employees.
#3 pertains to my first comments. The government will buy and hold securitzed assets. I agree this is not EQUITY, it is a hybrid between EQUITY and a DEBT security.
#4 is where I agree full heartedly. Oversight is a MUST! We must put someone in a postion to monitor these funds. Which, is not being disputed by Treasury Secretary Paulson or Charmian Bernanke.
With #5 I am unsure as to whom this applies. In the course of underwriting and then selling assets, the only way accountability is passed onto the seller is if they had inherent knowledge that the quality of these items was significantly lower than they represented.
Bottom line, this is truly a historic time in the United States economic and financial landscape. This will end up in a DEPRESSION more substantial than the Great Depression, if there is no government intervention.
My Best to all of you,
Devin
Thank your for your analysis, Devin! I guess with #2, I don’t think that executive compensation should be codified in all cases. I am concerned about executive compensation for those companies involved in the bailout. I think executive compensation should be limited in terms of what they receive as a result of getting federal monies for the bailout. I don’t think that it should apply widespread.
My problem with the idea that government could make money surrounds the fact that the government would then have to find someone willing to buy these assets down the road. Many agree will be hard to unload once the government takes them over — which is why some feel that this is a straight-up bailout.
Great write-up, Miranda and I love the link to Angry Bear. A good deal of this mess was conceived and executed under the sacred mantra of “maximizing shareholder returns,” which seem to make the stupidest actions acceptable—unless/until they blow up.
But why is everyone is so surprised. Nothing’s changed since the ancient adage “If it looks to good to be true it probably is” was coined.
Thanks for sharing, Miki! Hopefully we’ll learn for the future. But, alas, I fear we are doomed to repeat it.
Of course we’ll repeat it. What else would you expect?
Oh we will repeat it, don’t you worry. :-) And Devin, unless they can guarantee it, I don’t trust the govt. to make a dime on these mortgages – they cannot seem to do anything else right, so why this?
My thoughts exactly, David!
History always repeat itself. We will recover from this and new greedy CEOs will take over and in 20-50 years there will be another crash and then we will have to bail them out.
The market always goes up and down, the reason why this one look bad is because of inflation. And we keep changing laws based on the current market and then that does not work and we revert the laws to protect the American citizens. The cycle continues.
Good points, Brian! I think another problem is that we now think, for some reason, that there should be no downcycle. Our leaders, scared lest a downcycle threaten their election hopes, have been trying to keep growth going — even though there is no way to constantly sustain growth at a rapid pace.
Devin, you state that the securitized assets are a hybrid between equity and debt, but isn’t that the problem with them? This “hybrid” really means that nobody knows what’s in them and this is why these insitutions are failing, because the securitization effectively hides bad debts in packages of debt and equity. It is because of lack of confidence in these securitized assets and the quanities involved that there has been a loss of confidence in the markets, to imply that those same securitized assets are a secure form of equity or guarantee for the taxpayer is surely wrong? Also stating that #2 is a slippery slope as other employees might get involved; it does claerly state “executive compensation”, I can’t see how that would ever include eployee wages. The point being that executives of these insitutions deserve no compensation, whereas the employees still deserve to be paid. This is assuming that “wages” and “compensation” are not being deemed the same thing.
Good points, Bransby! I also think it is important to note, as I stated above, that the executive compensation limits are solely for the companies that accept the terms of this bailout.
But the big worry I have here is that the government won’t be able to sell these assets. It’s not a straight up loan like to AIG, and it’s not like Chrysler, where things could easily turn around. We’re talking about taking BAD assets — assets everyone knows are suspect.
You say the government will buy these assets at fire sale prices. Is this the same government that buys $600 hammers and $400 toilet seats?
Besides that, this will require the government to hire thousands of new employee and hundreds of managers to push the paperwork around for years and accomplish little or nothing. There is no way an organizataion as big and as inefficient as the U.S. government is going to come out ahead on this deal. Don’t let them kid you. This will cost all of us a bundle.
I agree shakey! There is no way the government can make money on the deal as written. The only CHANCE (and that might even be pushing it) of making money back is through loans.
LOL… very well summarized. :)
Sounds a lot like cowboy tactics to me.
Thanks Francois. I am concerned that even a version of Paulson’s plan is being pushed through.