The emergency legislation currently before Congress was ill-conceived – or more accurately, not conceived at all.
As Congress tried to improve what Treasury originally requested, an amalgam plan has emerged that consists of Treasury’s original Troubled Asset Relief Programme (Tarp) and a quite different capital infusion programme in which the government invests and stabilises weakened banks and profits from the economy’s eventual improvement. The capital infusion approach will cost tax payers less in future years, and may even make money for them.
Two weeks ago the Treasury did not have a plan ready – that is why it had to ask for total discretion in spending the money. But the general idea was to bring relief to the banking system by relieving banks of their toxic securities and parking them in a government-owned fund so that they would not be dumped on the market at distressed prices. With the value of their investments stabilised, banks would then be able to raise equity capital.
The idea was fraught with difficulties.
The toxic securities in question are not homogenous and in any auction process the sellers are liable to dump the dregs on to the government fund.
Moreover, the scheme addresses only one half of the underlying problem – the lack of credit availability.
It does very little to enable house owners to meet their mortgage obligations and it does not address the foreclosure problem.
With house prices not yet at the bottom, if the government bids up the price of mortgage backed securities, the taxpayers are liable to loose; but if the government does not pay up, the banking system does not experience much relief and cannot attract equity capital from the private sector.
A scheme so heavily favouring Wall Street over Main Street was politically unacceptable. It was tweaked by the Democrats, who hold the upper hand, so that it penalises the financial institutions that seek to take advantage of it. The Republicans did not want to be left behind and imposed a requirement that the tendered securities should be insured against loss at the expense of the tendering institution. The rescue package as it is now constituted is an amalgam of multiple approaches. There is now a real danger that the asset purchase programme will not be fully utilised because of the onerous conditions attached to it.
Nevertheless, a rescue package was desperately needed and, in spite of its shortcomings, it would change the course of events. As late as last Monday, September 22, Treasury secretary Hank Paulson hoped to avoid using taxpayers’ money; that is why he allowed Lehman Brothers to fail. Tarp establishes the principle that public funds are needed and if the present programme does not work, other programmes will be instituted. We will have crossed the Rubicon.
Since Tarp was ill-conceived, it is liable to arouse a negative response from America’s creditors.
They would see it as an attempt to inflate away the debt. The dollar is liable to come under renewed pressure and the government will have to pay more for its debt, especially at the long end. These adverse consequences could be mitigated by using taxpayers’ funds more effectively.
Instead of just purchasing troubled assets the bulk of the funds ought to be used to recapitalise the banking system. Funds injected at the equity level are more high-powered than funds used at the balance sheet level by a minimal factor of twelve - effectively giving the government $8,400bn to re-ignite the flow of credit. In practice, the effect would be even greater because the injection of government funds would also attract private capital. The result would be more economic recovery and the chance for taxpayers to profit from the recovery.
This is how it would work. The Treasury secretary would rely on bank examiners rather than delegate implementation of Tarp to Wall Street firms. The bank examiners would establish how much additional equity capital each bank needs in order to be properly capitalised according to existing capital requirements. If managements could not raise equity from the private sector they could turn to Tarp.
Tarp would invest in preference shares with warrants attached. The preference shares would carry a low coupon (say 5 per cent) so that banks would find it profitable to continue lending, but shareholders would pay a heavy price because they would be diluted by the warrants; they would be given the right, however, to subscribe on Tarp’s terms. The rights would be tradeable and the secretary of the Treasury would be instructed to set the terms so that the rights would have a positive value.
Private investors, including me, are likely to jump at the opportunity. The recapitalised banks would be allowed to increase their leverage, so they would resume lending. Limits on bank leverage could be imposed later, after the economy has recovered. If the funds were used in this way, the recapitalisation of the banking system could be achieved with less than $500bn of public funds.
A revised emergency legislation could also provide more help to homeowners. It could require the Treasury to provide cheap financing for mortgage securities whose terms have been renegotiated, based on the Treasury’s cost of borrowing. Mortgage service companies could be prohibited from charging fees on foreclosures, but they could expect the owners of the securities to provide incentives for renegotiation as Fannie Mae and Freddie Mac are already doing.
Banks deemed to be insolvent would not be eligible for recapitalization by the capital infusion programme, but would be taken over by the Federal Deposit Insurance Corporation. The FDIC would be recapitalised by $200bn as a temporary measure. FDIC, in turn could remove the $100,000 limit on insured deposits. A revision of the emergency legislation along these lines would be more equitable, have a better chance of success, and cost taxpayers less in the long run.
The writer is chairman of Soros Fund Management
Copyright The Financial Times Limited 2008
Last edited by atm on Wed Oct 01, 2008 1:33 pm; edited 1 time in total
Fantastic audio, Fintan. As a long time BFN sponge (shit, I got into you when you were still posting at rumormillnews) I think this was a terrific synthesis and analysis of the current situation and maybe the most incisive audio for me. We kind of know the Obama/McCain thing is more Punch'n'Judy stuff, likewise the Hillary crap. We're on the next level. Good on yer dude.
PS: Yeah, I'll send you a donation just as soon as I reconnect with my frozen UK bank account on my return. Thank fuck I'm with the Nationwide..
John Fucking Kerry, eh.
Senate Bailout Lite Bill = Same 'ol Bailout with fancy ribbons.
Senate to vote on revised version of bailout plan
(NECN: Peter Howe) - The Senate is taking the lead on a financial
bailout package. Senators will vote tonight on the bill,
and they expect it to pass.
John Kerry and other members of the Senate are
trying to do what the House couldn't do on Monday:
pass a $700 billion bill called a Wall Street bailout,
or rescue, or economic recovery plan
-- depending on your politics.
So, what are congressional leaders eying to sweeten the bailout? First,
business tax breaks the GOP wants and a measure exempting 20 million
middle-class taxpayers from paying the higher AMT, alternative minimum
tax. Also, raise FDIC insurance coverage for bank accounts from
$100,000 to $250,000. These are not core issues in the current situation,
Meanwhile, there is also a major effort underway by business and
political leaders to get reporters to stop calling this a bailout.
Also calling for an end to the B-word is Boston College professor Alicia
Munnell, a former White House economic adviser and assistant U.S.
Treasury secretary in the Clinton administration.
"It's not throwing it down a hole, it's going out, it's buying assets, holding
those assets until the market calms down and then selling those assets in
the future. If we could get rid of the term bailout, we'd be a step ahead,"
_________________ Minds are like parachutes.
They only function when open.
'cynicuseconomicus.blogspot' is good on the wheels of the financial
system - but there's no appreciation of the Globalist agenda there.
Meanwhile, here's the state of play with the Senate stunt:
A Senate maneuver would marry four different pieces of the legislation:
the bailout plan, a series of tax-break extensions for business, a measure
to limit the spread of the alternative minimum tax and a measure that
would force insurance companies to treat mental illnesses the same as
other health problems.
But House leaders said there was no guarantee that the revised
legislation would pass the House. Majority Leader Steny H. Hoyer (D-Md.)
said some conservative Democrats may have reservations about
supporting the new bill. But he pledged to continue working to find
House Minority Whip Roy Blunt (R-Mo.) said on the same program that
some Republicans who voted against the plan Monday were reconsidering
because constituents, who saw the markets take a major spill after the
vote, have changed their minds.
"I think three things have happened since Monday that help us," Blunt
said. "One is that calls to members' offices have changed from being 90
percent 'Don't do this' -- they're at least 50-50, and in some offices
they're 90 percent, 'You have to do something; this may be the best thing
out there.' The FDIC change, I think, is helpful for many of our members
on both sides of the aisle. And frankly, this accounting rule that we've
been urging for weeks now that the SEC chairman moved forward on
yesterday, all three of those things make a difference, and make a
difference in a helpful way."
The business community has launched a full-court press to
pass the legislation, with the Chamber of Commerce, the Business
Roundtable and the National Federation of Independent Businesses
all reaching out to members and encouraging them to talk to
lawmakers on Capitol Hill.
By DAVID GADD - BusinessDay.co.nz | Thursday, 02 October 2008
The US Senate has passed the financial bailout bill, with both presidential
nominees John McCain and Barack Obama in the Senate voting - and
both supported it.
This is of course just the first hurdle for Hank Paulson's bail out package -
it now faces a vote before the US House of Representatives on Friday.
The Senate today passed the bill by a 74-25 majority.
The package still has at its heart the Paulson US$700 billion bail out
to buy toxic debt and restart liquidity in the markets, but also includes
a rag-tag of other elements to win the support of congress.
Many of the politicians in Congress are facing re-election at the same
time as the US presidential race and were wary of a backlash from voters
who saw the bail out as tax payer money used to help out Wall St
bankers who have for years taken million dollar pay cheques.
Because of the add-ons, the bail out price tag will be higher than the $700
billion that the Treasury would use to buy troubled assets - a further $110
billion has been added to the cost.
Congressional leaders added two sweeteners to the bill - a tax cut and
extended federal protection for bank deposits - with the expectation it
would sail through the Senate and then return to the House for an up-or-
The bill now includes temporarily raising the FDIC (Federal Deposit
Insurance Corporation) insurance cap to $250,000 from $100,000 -
insurance covering banks.
The bill also adds popular tax measures.
It will extend a number of renewable energy tax breaks for individuals
and businesses, including a deduction for the purchase of solar panels;
extend research and development credit for businesses and the credit
that allows individuals to deduct state and local sales taxes on their
In addition, the bill includes relief for another year for an Alternative
Minimum Tax, without which millions of Americans would have to pay the
so-called "income tax for the wealthy" - this piece off arcane US tax law
has been a bone of contention in the states for years and it is pure
expedience to have this issue piggy backing the bail out package.
US factory activity shrank in September to its lowest since the 2001
recession and major automakers reported plunging US sales for
September, led by a 34 percent slide at Ford Motor Co.
In Europe, France and Germany clashed over the idea of a US-style
financial rescue fund for Europe amid further signs of contagion from
the global credit crisis.
Italy's UniCredit became the latest bank under scrutiny after backing
away from its 2008 earnings targets.
BUFFETT TO THE RESCUE
The US vote has capped another whirlwind day in the markets in which
shares of bellwether US conglomerate General Electric Co plunged as
much as 9 percent on concerns about future earnings until super-investor
Warren Buffett took a US$3 billion stake.
It marked the second time in eight days Buffett came to the rescue of a
corporate giant. One of America's most famous investors and among the
richest men in the world, Buffett said last week he would invest US$5
billion in Goldman Sachs Group Inc.
The S&P 500 closed down 0.45 percent, suggesting equity investors
expected the bailout to pass, but they had also expected the House to
approve the plan on Monday.
With all 435 members of the House and 35 of 100 Senators up for re-
election on November 4, politicians were fearful of voter backlash against
a plan widely seen as a taxpayer bailout of Wall Street's errors.
Fintan.......one thing I cant get a grasp on in this bailout bill is the URGENCY to get it done immediately.........Hard for me to tie this rapid response to the Globalist Agenda........if this was part of the agenda wouldnt they be better off without the "need to get it done immediately" theme...............
Read this post from another site............
This is in breaking because it is URGENT that we get the word out to every citizen in this country about not only what is happening but why it is happening. Karl, your latest video (and tireless work on this) is awesome, but you left out the most important part: WHY is this administration absolutely desperate to buy $700 billion in toxic foreign debt *right now* before any more time passes? Understanding this is the key that unlocks the truth for everyone. I'm beseeching all of you here, please use this thread to explore, explain and enunciate clearly the REASONS this atrocity is being forced upon us. Substantiating hyperlinks are VERY helpful, please. We need to understand WHY this is happening.
The short version seems to be not only are all the banks insolvent, the country itself is insolvent. The fiat money system is about to fail. This could well result in not only GDII, but total World War as well.
Here is, from what I can tell, what is really behind the Paulson Plan:
1) The government's fiscal year ended yesterday
2) The interest on the national debt this year is going to be about $1 trillion dollars
3) The Treasury is about $700 billion short of being able to pay the interest
4) The Paulson Plan purchases about $700 billion in toxic foreign assets
5) The foreign banks and investors then will take that money and purchase US Treasuries
6) The USA does not default on its debt immediately, as is about to happen (financial Armageddon)
7) Foreign countries are threatening "panic selling of US debt": http://www.bloomberg.com/apps/news?pid=n....
Paulson/Bush will veto any Bill that does not have this provision
As others here have put it, this is the mother of all margin calls on US debt.
Quoting directly from a poster on another forum who has been referenced here in at least two threads:
"The whole point of this $700 billion 'gift' to the primary dealers is to keep the US Treasury bubble from bursting. Even at today's ridiculous artificially low Treasury yields, the interest on the Federal Debt is over $400 billion per year. This year's budget deficit was around $400 Billion. With next year's budget deficit expected to approach or maybe exceed $1 TRILLION, they will need to have the primary dealers be able to absorb an ADDITIONAL $600-$700 Billion. Do you think they plucked that $700 Billion figure out of thin air? Paulson's plan is to give the primary dealers $700 billion of balance sheet relief with the understanding that they replace DOLLAR FOR DOLLAR the toxic mortgage securities they offload to the Taxpayer with newly issued US Treasuries. This whole thing is about lining up financing for next year's HUMUNGOUS Federal Budget Deficit in advance. The $700 Billion "gift" allows the primary dealers to handle $600-$700 Billlion more in expected 2009 Treasury issuance than they were able to do this year. They were able to handle $400+ Billion this year, so with $700 Billion of "help", they should be able to absorb the $1 Trillion next year. This how you go about financing (or at least try to) a $1 trillion budget deficit without printing. The real reason for this "bailout" is not that complicated and does not require any Tin Foil at all. Can you imagine Paulson and Bernanke telling a Congressional Committee that they expect the economy to completely tank next year and that the budget deficit is going to approach or exceed $1 Trillion? And by the way we need you to help the Primary Dealers out with $700 Billion in balance sheet relief at taxpayer expense so that they can help us finance it. No. They can't do that. So this is what we get. Vague references to "financial meltdown". It's not like they are out-and-out lying. Failed Treasury auctions will not produce pleasant consequences for anyone in the US. My point is that this "bailout" is not part of some Wall Street conspiracy to loot the US Treasury and taxpayer. Sorry to spoil everybody's fun. Rather, it is how the Treasury gets prepared to finance next year's gigantic budget deficit without printing money. I have said before that I am sure that the Chinese have already made "the phone call". The one where they say "You start printing and we start selling.""
Here are the primary dealers: BNP Paribas Securities Corp., Bank of America Securities LLC, Barclays Capital Inc., Cantor Fitzgerald & Co., Citigroup Global Markets Inc., Credit Suisse Securities LLC, Daiwa Securities, America Inc., Deutsche Bank Securities Inc., Goldman, Sachs & Co., RBS Greenwich Capital, HSBC Securities Inc., J. P. Morgan Securities Inc., Merrill Lynch Government Securities Inc., Mizuho Securities USA Inc., Morgan Stanley & Co. Incorporated, UBS Securities LLC
These primary dealers (PDs) all have hopelessly impaired balance sheets (they are insolvent) and as a result Treasury auctions are on the brink of total failure. And if Treasury auctions fail...
Dont know if there is any merit on this but there has to be some underlying reason for having to get this done so fast........
Some places(posters) have said its the "Mother of all Margins calls" even using the words "blackmail and extortion"
Anyone else have any opinions please educate me..........[/i]
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