I read this article from an economist part of a large like-minded group who is urging Congress not to proceed on the bailout proposals, as laid out by Treasury and the administration. It's worth your while to check it out!
Re: bailout plan. This guy has it right in my view. I've been listening to a lot of folks on the issue. We don't need a bailout, at all. The more the superbanks holding onto "troubled" assets get the notion that the Feds are not going to come to the rescue, the quicker the credit markets will thaw on their own.
The worst unsaavy risk takers (and I'm beginning to think Goldman Sachs has a heavier stake in this than they've let on) will go bankrupt. The article explains why that's actually good. Shareholders in firms going BK will be hammered, and that's good (there are no guarantees in stocks, when you invest, you take on the risk the firm you're buying into might be retarded, and you accept that for the prospect of a nice return). Creditors claim the solvent business units and residual assets.
I think the author is dead right on his point that the freeze is occurring because Wall St. believes a taxpayer-funded rescue is on the way. And of course they'll try to scare the bejezus out of you, me, gov't, and anyone who'll listen, because it means they'll be saved from their bad trades.
If I make a bad trade in my stock portfolio and get wiped out, there's no bailout for me. I knew that going in, and it's top-of-mind when I decide what and how to trade. I want to try and make some money, but I also don't want to be wiped out. So, I try to be careful.
Frozen, because why sell your crap at market prices when you can hold out for the Treasury, who might just buy at 50 to 80 cents on the dollar, rather than settling for 20. Take Treasury off the table, and the market will naturally reliquify.
I'm a big fan of Investors Business Daily. I also generally enjoy CNBC, and I love the can-do optimism of Larry Kudlow, host of Kudlow & Company. He frequently writes in the op-ed pages of IBD and makes a lot of sense to me.
In the 30-SEP-08 issue, page A11, Kudlow makes the case for the bailout plan and urges us and congress to calm down and come back to the table and get it done. Once in place, we'll all be the better for it. By the end of his argument, he calls the idea a, "win-win-win-win," claiming a likely windfall for taxpayers.
I have heard this line of reasoning from a number of folks, not least of all Treasury's Paulson and the Federal Reserve's Bernanke. But I am always left to wonder in plain country-bumpkin logic: If these troubled assets would be such a great thing for taxpayers to finance, likely to yield profit down the line, why isn't private money stepping right up all over the place to buy?
I think the answer is just what the author of the article states. Other sources I've been listening to also warn that we're not just talking about bad mortgages here. Treasury would be buying "mortgage backed securities" and "collateralized debt obligations" (although hashes of the failed bill and of the reformulated bills yet to come to a vote would expand Treasury's power to buy other types of securities than simply the mortgage backed paper defined at the plan's unveiling...sheesh).
I'm learning that a lot of fraud has been going into these securities. The allegation is that lenders would take a helping of junk debt, say auto and consumer loans, credit card debt, etc., and fashion it into a new security, but to make sure the security was rated highly by the investment rating agencies, a couple of mortgages would also be attached.
So we're not only dealing with troubled mortgage debt, but also the types of junk debt that is typically even more risky than mortgages! How likely would the taxpayers be to make back their money on that? I think Wall St. knows how likely, and that's the real reason the market pricing on this paper is so low.
Also developing: The Chicago Mercantile Exchange is hammering out a standardized and regulated exchange for trading credit default swaps, another exotic security tied to this mess.
CDS's "swap" a stream of payments from the buyer of the CDS to the seller, in exchange for a payout of the face-value of the CDS by the seller to the buyer, in the event that a credit default event occurs on the debt to which the CDS is tied. It is like a form of insurance that a firm can purchase to hedge exposure to risky debt.
These have become very popular among the superbanks issuing all this crap mortgage paper. However, unlike stocks and bonds and commodities, which trade on exchanges with explicit rules and standards, CDS's trade between parties "over-the-counter". The parties basically just negotiate a CDS contract and deal. But, because of the economic downturn, a problem has developed. Some firms having written and sold a lot of CDS's to debt holders looking for protection, are popping because they can't make good on the payouts. The chance that a party with whom you trade doesn't hold up his end of the bargain is called counter-party risk. It's booming, and is part of the reason credit markets have frozen.
The CME's new idea of a regulated exchange for CDS's solves this problem. Strict standards would screen parties to insure parties will abide by their obligations. Once screened and approved for trading, the exchange becomes the counter-party to all trades. This adds confidence. By acting as "seller to all buyers" and "buyer to all sellers", the traders of CDS's would have security in the knowledge that their trading partner has been vetted and approved, like they, and in the rare event a party did fail to deliver (necessarily so because the CME wants to stay in business and limit its own risk, ergo the strict standards to be approved for trading) the CME would make good for the counter-party.
Hey! This is the market fixing its own problems! Another reason to keep gov't on the sidelines. We need to give private enterprise the space to work out solutions like this.
Coming back to Larry Kudlow and CNBC in general: their anchors have made so much hay about pushing this bailout through that I'm starting to wonder if there isn't an agenda behind it all. It may only be a rather subconscious result of the workplace culture. It is GE who owns the NBC empire and is responsible for all their jobs, and GE had spread into banking and finance big time over the last few years. Heck, I used to offer GE credit cards to every customer I did business with at my last retail job. GE likely has skin in this game. For some of the anchors and hosts, it's come down almost to the level of insulting the intelligence of anyone who has appeared on the channel with a dissenting view of the bailout.
Finally, I'll close up this post by touching on the safety of your own checking and savings accounts. Much fear-mongering has been made about this as well. Jim Cramer's said that if this doesn't get done, we're headed for Great Depression II, and you'll one day head over to your neighborhood ATM and it won't have any cash.
Even President Bush had made similar comments about the availability of your checking and savings funds at your local bank during his address on prime time TV last week. You know, I thought our top leaders' jobs were partly to offer calm and confident leadership during crisis events. But I found Bush's comments truly scary! You mean, I will walk up to my bank soon and my money might be gone?!
For shame! Put the gun down. Stop pointing it at us, we're the ones you're supposed to be concerned about protecting!
The truth is, our everyday checking and savings accounts are perfectly safe. They're of course insured by the FDIC to $100,000 (if you're fortunate enough to have more, don't be silly and make sure it's spread around). What bank failures (and I'm talking about depository banks here) we have seen so far have been largely triggered by fear on the part of the depositors. WaMu was the most recent notable example. They were shaky and likely would have failed anyway, but depositors' money was never in danger. The mass exodus of depositors' funds just helped speed up the process. Those caught unawares experienced only a name-change as the deposits were later bought up by JPMorgan Chase. After a weekend of important paperwork, it's business as usual. The ATM still has cash to give you.
The rise of large corporations has led to a consolidation of banking. Espcially in the larger cities, you might have your everyday accounts at a superbank with national and even global exposure. These have turned out to be the riskiest banks because their large size meant they could do more toxic subprime mortgage business.
Those folks who are or were scared about their money and pulled it from a superbank, what are they now doing with it? In today's modern economy, hard cash just doesn't work. You need to be able to write checks or more likely, swipe some plastic to pay for things. So, these fearful folks are turning to smaller local and regional banks and credit unions and the like.
These banks are small enough that during the housing boom, what mortgage business they may have originated, they later probably sold that debt to a superbank eager to have it. So, the small local banks have the cleanest balance sheets.
With such fearful depositors streaming over, we are now and will continue to see depository capital moving away from the superbanks and into the locals. There the increased reserves will mean credit for business and individuals will be frozen, rather it will just come from a different bank.
You could make the case that this might be better. Your local bank is probably more likely to know who you are personally, and know about your business. Risk can be more appropriately judged.
So...all this fear-mongering of the past couple of weeks has, for me, become a side-show. I am now more convinced than ever that this is an effect of the fat-cat folks in Wall St. manipulating their levers of influence to try an engineer a bailout for themselves and their own bad trades, at the expense of us all.
Keep the pressure on your representatives, and use the article linked up top and musings like my own to justify your position. If you get pushback, get your representative to justify his or her view in a way that makes sense to you at least.
As the article advocates, the next bill to come up for vote should not be to bailout, but rather to dismantle the faulty government policies and entities which disconnected risk from reward to get us here. And that's all. Free markets were not to blame, because they were being distorted. And as I hope you might be able to see a little bit now, free markets are already beginning to steer us out.
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