House Financial Services Chairman Barney Frank (D., Mass.) said Wednesday he was disappointed Mr. Paulson was scrapping the asset-purchase plan. "I think he's wrong not to use it that way," Mr. Frank said.
President-elect Barack Obama is pushing Congress this year to approve as much as $50 billion to save cash-starved U.S. automakers and appoint a czar or board to oversee the companies, a move that would require President George W. Bush's support, people familiar with the matter said...Still, the Bush administration so far has opposed bailing out the carmakers...``The intent of the TARP was to deal with the financial industry,'' Treasury Secretary Henry Paulson, who is administering the program, said yesterday in a press conference. ``My focus is on the financial sector, getting credit going, getting lending going.''
If [Neel] Kashkari [formerly of Goldman Sachs] is on the job, does anyone think Treasury will be driving a hard bargain with Goldman on its mortgage assets? And while we're on the subject of Goldman, under what criteria did Goldman and Morgan Stanley qualify as two of the nation's nine strongest financial institutions? Just wondering...
It's no wonder that the world is scratching its head. Congress approved a bailout of bad assets and the Treasury Department has used it to buy stakes in preferred banks. Some of those banks, J.P. Morgan Chase & Co. and Bank of New York Mellon, look to be in decent shape. Others, such as Morgan Stanley and Goldman are highly leveraged firms that, regardless of what kind of charters they hold, are not too far from hedge funds...
...to many investors and citizens, Neel Kashkari is just another Wall Street insider who has close ties to the Treasury chief. Kashkari joins Paulson, Josh Bolton, Steve Shafran, Ken Wilson, Dan Jester as former Goldman bankers who now saturate the administration's team handling the crisis...
Kashkari came from humble beginnings, but he studied hard. You can guess the rest of the resume: Wharton Business School, homes on both coasts, he met Paulson and got his job by knowing the right people. He stayed up all night working on the bailout proposal even though the document, at a total of three pages, was politically inept and borderline unconstitutional.... In short, he's really part of the elite that brought you The Biggest Financial Crisis Since The Great Depression.
Wall Street and banks live by short-term loans.
Since the Fed operates on the short term end of the interest rate spectrum,that's where investment bankers borrowed their billions. Borrow at the low short-term rates and lend long on mortgages and the like at higher rates, and earn the spread. That was the Fed enabled game.Kessler today:
But here's the current dilemma: If Treasury pays more than market price for these distressed securities, it would look like a taxpayer gift to Wall Street. That's politically unfeasible. So Treasury has to pay the current distressed prices. (Despite this week's stock-market bounce, prices are still dropping on toxic CDOs.) But if Treasury pays current, fire-sale prices, it would lead to major write-downs at banks. Since most of these securities are collateral for other loans, and regulators force banks to have minimum capital requirements and cash on hand, any write-down in value immediately means new capital needs to be raised. And then who would throw good money after bad?EPJ in September:
Treasury Secretary Paulson's "bailout" plan has little to do with bailing out banks in trouble. In fact, if his plan is approved by Congress, it is likely the number of banks that will be in trouble will hardly decrease. Billions more in real bailout money will be needed to bail these banks out...You see, Paulson wants to buy the mortgages on the cheap, at their "real" value. But the bad stuff, the sub-primes, and the like, are worth at best 50 cents on the dollar. For banks that are insolvent because they own this paper, a Treasury purchase of 50 cents or less on the dollar isn't going to help things, indeed, it may make it clear to even more that these banks' liabilities far exceed their assets. The only way a Treasury purchase of these mortgages would help is if they were bought closer to face value, boosting the value of the banks assets.
Government purchase of bank stock...is a transfer from taxpayers to people who took huge risks and lost. The United States, and the world, got into the current mess by trying to insure away risk, which everyone should have known was a fool's errand. Thus bailing out risk-taking -- or providing new guarantees for loans and deposits -- will generate even greater problems down the line.
It is time for the government to do the one thing it does well: nothing at all. This might mean serious economic pain in the short term, as more banks fail and the economy suffers through a recession. As for a cancer patient who has a tumor removed, however, the long-term benefit will more than compensate.
Fed officials increasingly talk about the challenge they face with a phrase that President Bush used in another context: “regime change.”
This regime change refers to a change in the economic environment so radical that, at least for a while, economic policy makers will need to suspend what are usually sacred principles: minimal interference in free markets, gradualism and predictability.
Here's another interesting twist: In the original Paulson Plan, he didn't ask for authority to acquire equity in the banks. Remember, that provision was slipped in later, allegedly with the "free market" Republicans kicking and screaming, at the insistence of "liberal" Democrats who wanted "taxpayer protection."
Now, they haven't even started buying up the $700 billion worth of bad assets, as far as I know. I know for sure that as late as YESTERDAY, Bush and Paulson were saying, "You've got to give this plan [of buying assets] time to work."
And yet, now they have decided that that option by itself is NOT working (even though this contradicts the timetable they laid out just YESTERDAY for it), and have decided instead that the government needs to "aggressively" purchase ownership in banks, though it might be seen as "punitive" by some analysts.
Now how the heck is an injection of capital in exchange for equity going to be construed as "punitive"? Oh, well maybe it's because the new plan isn't even clear if bank participation will be VOLUNTARY, and even HEALTHY banks may not be safe.
Do you folks see what that means? Once you take away the requirement for the recipient bank to sign off on the transaction, then there's no way to determine a "fair" price. So if those two vague principles come down on the side of more government power (and why wouldn't they?--the markets will be in need of "help" for years to come), that means the government can look around and spot a company it wants. Then it gives some bogus reason that it needs to ensure stability with this company--remember, the company itself doesn't need to be in trouble--and it can say, "We'll give you $x billion and in exchange we own y% of your stock." And remember, the company can't even say, "No thanks."
This is not good.
The Treasury Department this week plans to start outsourcing the management of up to $700 billion in troubled securities using special contracting authorities that enable it to retain private portfolio managers, custodians and other financial services consultants without following standard acquisition procedures....Bottom line, the public was right in opposing this measure, and one has to begin to think that Naomi Wolf is right and that a coup has taken place in America.
...it means that the government has little time to assess the companies that will be partners in what could become one of the largest public-sector funds in American history. Some of the same firms that have played roles in the rise and collapse of the mortgage-backed securities market may end up guiding the government as the bailout unfolds, department officials said...
Contracting specialists said the department has the authority to retain "financial agents" to manage money on its behalf. By using that authority at a rapid clip, instead of through traditional acquisition procedures, the government creates a risk that it won't hire the best firms at the best price, they said.
D. Kent Goodger, a contracting official for four decades who now teaches procurement classes for the federal government, said decisions to bypass federal acquisition regulations for urgent and compelling reasons in the past has led to trouble and cost overruns. "By rushing ahead, doing this quickly, it creates inherent risks," Goodger said...
An analysis by Taxpayers for Common Sense, a watchdog group, found that the government's use of private firms during the resolution of the savings-and-loan crisis two decades ago lead to "untrammeled payouts to the private sector and reprimands from Congress and the Government Accountability Office."
I read the whole thing myself -- and found odd things like production credits for "marine renewables" and specifications for "residential top-loading clothes washers."...
Loopholes: A financial institution can buy $50 billion of financial toxic waste in the form of subprime mortgages, declare bankruptcy, and the Treasury Department is permitted to buy the toxic waste for $60 billion. Or $100 billion...
The U.S. Treasury would be authorized to "guarantee" home mortgages, essentially becoming a co-signer, to eliminate foreclosures. If the home-owner stops paying his mortgage, taxpayers will be on the hook. The Treasury Department can also eliminate a "reasonable" amount of a home owner's mortgage debt...
Special provisions include tax breaks for:
* Manufacturers of kids' wooden arrows - $6 million.
* Puerto Rican and Virgin Is- lands rum producers - $192 million.
* Wool research.
* Auto-racing tracks - $128 million.
* Corporations operating in American Samoa - $33 million.
* Small- to medium-budget film and television productions - $10 million
