Tuesday, September 23, 2008

The Bad News Bailout

By Robert Wenzel

There is nothing good to say about the Paulson Bailout Plan. Nothing.

From a short-term technical perspective, from a government oversight perspective, from a conflict of interest perspective, from a political perspective, and from a long-term perspective, there are serious problems which exist with the bailout plan at each level.

On a short-term technical perspective, problems begin at the price at which mortgage paper will be bought in the bailout. Treasury Secretary Paulson claims the paper will be bought at market rates. This is a myth, since if the Treasury were to only buy at the market price, the bailout would be superfluous. The banks, by defnition, could just sell at the market price.

Further, much of this paper is not trading so it is not a liquid market where it is easy to determine a market price.

If we assume that the Treasury somehow comes up with a "market" price, how does this help banks and other financial institutions that are insolvent because of the crashing mortgage market? Paying a "market" price of say 50 cents on the dollar will not help banks that are insolvent.

Thus, while Paulson seems to continue to promote the concept of purchases of mortgage paper at a discount, Fed Chairman Bernanke seems to understand the problems of buying discount mortgage paper. In testimony before Congress, Bernanke said that the mortgage paper will have to be bought not at ``fire-sale prices'' but, instead, officials need to set a long-term value on assets, intending to hold them until they mature or markets improve. Thus, he wants to pay near maturity value--which is nothing short of a gift to those holding that paper.

A further problem of the Paulson and Bernanke valuation methods is that no one knows exactly what shape individual mortgages in various pools are in. If it is a mortgage on a house that has been foreclosed, is the house in close to any shape to be sold? How will Paulson and Bernanke know these things without huge amounts of due diligence, and in some cases individual inspections of houses? How will the due diligence inspections be conducted in any type of competent timely manner when a financial institution needs money NOW?

A strategy based on buying mortgages in a kind of reverse mortgage auction, as Paulson would like to do, also raises the question of which institutions will be allowed to participate. Are these institutions on the verge of bankruptcy, or any financial institution? How will the financial system be "protected" if it is solvent, liquid institutions offering their junk at the lowest prices, and thus winning various auctions while banks on the edge of failure are "out offered" by the solvent banks?

From a government oversight perspective, the cluelessness of Congress comes into view when one realizes that much of their focus is on limiting excessive executive pay rather than focus on the $700 billion. It is as though there is a Brinks truck with $700 billion in it.The guards who are in the back of the truck and the driver are each being paid $500,000. True, the general range for their type salaries may be only $50,000, but to focus on this fact and not ask the driver where he is going with the $700 billion and what he is going to due with the money once he gets to his destination is absurd. Yet, Congress is asking little about the details of how the $700 billion will be dispersed and instead are focused on the comparatively inconsequential sum ending up as executive compensation.

And have you heard one question asked as to where Paulson is going to get the $700 billion in bailout money from?

From a conflict of interest perspective, the Fed has approved Goldman Sachs to be a bank holding company. Just what banks do they plan on buying and what is going to happen to the mortgages those banks hold? Isn't there potential for huge abuse of the price paid for mortgages held by banks Goldman Sachs acquires, since Paulson was the CEO of Goldman before becoming Treasury Secretary? What about Carlyle Group and the insider connections they have (Including Papa Bush who was a senior adviser before he retired)and the fact that a mortgage backed securities firm they ran collapsed and is just about to be re-organized? Who is going to supervise the prices they get for any mortgages they decide to sell? Clearly, Warren Buffett thinks there is some kind of edge for Goldman Sachs becoming a bank holding company. Less than a week after Goldman announced that the Fed had approved it becoming a bank holding company, Buffett, the man who always looks for the investment edge, announced he is investing $5 billion in Goldman. And, within 24 hours of Goldman receiving approval by the Federal Reserve to become a bank holding company, private equity (read Carlyle Group) was approved by the Federal Reserve to increase stakes in bank stocks up to 33%. Again, isn't there potential for huge abuse of the prices paid for mortgages held by banks Carlyle invests in? Why the sudden rush by Carlyle and Goldman to position themselves to buy into banks, when there is supposed panic everywhere?

From a political perspective what happens if some political pressure group wakes up to the fact that the United States government controls $700 billion in mortgages and decides certain special interests groups within that pool of mortgages held by the government should receive reduced mortgage payments and that others should receive increases in their mortgage payments. Is this not socialism?

From a long-term perspective, how is this bail out to be financed? Will it be an increase in taxes? Will the Fed just print the money? Will the Treasury just issue more debt and hope foreigners buy it, and at the same time crowd out private borrowers? Will it be a combination of the three? Any of these options will most assuredly suffocate the economy.

And what about the long-term implications of going from a profit and loss free market economy to a profit and protection economy, where the incompetent are kept in decision making positions, and dysfunctional organizations are kept alive? Instead of the best and the brightest rising to the top and creating and competing, we will end up with the incompetent, government coddled running the financial system of America.

In short, unless you are a managing director at Goldman Sachs or the Carlyle Group, there is nothing good in the Paulson Bailout Plan for you, nothing at all.

Robert Wenzel is an economic consultant and Editor & Publisher of economicPolicyJournal.com. He can be reached at rw@economicpolicyjournal.com.


  1. The fact they are even attempting to push this bill through is a crime in the taking. I would suggest a citizens arrest of these bank robbers, but America is so fucked up in it's collective mind right now, with 911 and legalized torture and oil company-Whitehouse connections, America has finally decided not to fight. I guess it's better for you all to sit in a corner and rock yourselves into neutral nobody's. It's not your problem anymore.

  2. "And what about the long-term implications of going from a profit and loss free market economy to a profit and protection economy, where the incompetent are kept in decision making positions, and dysfunctional organizations are kept alive?"

    I look at the business career of one George W Bush and I see somebody who is just returning the favors granted to him. Bailout is a term Mr. Bush is very personally familiar with -- repeatedly.

  3. The only way to end this criminal bailout is to call for a NATIONAL TAX STRIKE-boycott paying federal income taxes. We the people will NOT pay for it, it's the only thing left that we can do if they pass this bailout.

  4. Take our Constitution and run, this hand has played out, time to reshuffle the deck.

  5. Over and over again, I see the public discussing both sides of a completely false dialectic process.... ($700 Billion dollar bailout). Again the federal reserve is a private entity that has never been audited in its entire history, and can create this needed money from thin air. The banking system can easily be bailed out by federal reserve notes - so why did they need Congress to pass this bill?

    The real answer is they DIDN'T.

    But what they did need is an excuse to collapse the economy and the $700 Billion dollar bill is nothing more than a dog and pony show for everybody to get all chatty about, it changes NOTHING. But it gives the ruling the elite the excuse they need. While the puppet media is howling (because they realize they are going for the ride as well) - everything is going just according to plan, and that plan is to put you into poverty. It cannot be stressed enough - the bill is only an excuse to create an crisis, and use this crisis as a guise to tighten liquidity on the banking system and seize your assets.

    It is no different than a farmer who waters his crop (loosens liquidity) and watches his crop grow (economy flourishes.) Then at the time of harvest he halts liquidity (stops watering to dry the wheat out for harvest). Then he comes in and cuts his crop down (asset seizure after credit tightening.) After taking everything fresh seeds are planted (a new economy is started) and it is watered (liquidity is reapplied) and the cycle repeats. Your grandparents were a good example of this in action as the real cause of the financial crash was the tightening of liquidity.

    The Congress voted against the bill because if they had not - the ruling elite would not have an excuse to create a crisis. This is a long term plan being craftily played out. Remember AGAIN the federal reserve can create this money from nothing, they never needed the $700 Billion. As you kill a deer you hang in the garage for a week to drain out its blood. As you kill an economy you tighten currency for a prolonged period until all the businesses and people are on their knees. Then you come in and buy all the businesse for pennies on the dollar, and take control of everything.

    It works great:
    - You make America a 2nd world country and the people work for free.
    - Through various subsidiary corporations you quietly buy up all the industries and control EVERYTHING.
    - Through the guise of an economic recession you can start labour camps and raise taxation to crippling levels.

    And while this is being done to you - people can feel relieved that they 'fought the good fight' and convinced their senator to vote against the bill.

    What should have been on the bill is the abolishment of the Federal Reserve and the right for them to create currency. Again everybody needs to watch the documentary The Money Masters which can be seen for free at video.google.com.. Write your senator ONLY ABOUT THE ABOLISHMENT OF THE FEDERAL RESERVE AND THEIR RIGHT TO ISSUE CURRENCY. It is the only issue that matters.

    Why Are People Going for Senators That Voted For This Bill?

    The bigger question is why are people not trying to get rid of ALL THE CORRUPT SENATORS, and keep people like Ron Paul that know the real cause of the problem. Email this to everybody you know - start a wake-up chain today!