The House Zaps the Bailout Bill 09/29/2008 05:21:39 pm by Dan Krohn

	Admission of error. This blog predicted that the bailout bill would pass. It did not - at least on first vote. Apparently congressmen and women can be made to listen when enough of their constituents make their voices heard - loudly. Given the political season there will be lots of finger pointing concerning the state of the economy and who is to blame. Ultimately, there should be some blame passed out for this fiasco, but it will be years before it is understood. Meanwhile, what's to happen next? It appears that Republican representatives were hearing from their constituents and became terribly afraid to vote for a bailout of the rich, when they have a history of sticking it to the less fortunate; and a number of Democrats in the house had heard enough from voters to vote against the bailout bill, too. To their credit, some intellectually honest conservatives oppose this bill because it goes contrary to their philosophy. This blogger believes that the current fiasco arises largely from a miscalculation by the Bush administration. Some news stories have been suggesting that the administration knew that the current crisis was coming some months ago and had already prepared the basic legislation they proposed. Well, it is to be hoped that they saw this coming a few months ago; otherwise the U.S. has had extraordinarily poor leadership. (Well, it seems as if that’s given.) But this blogger believes that the bailout bill was held back intentionally. Remember all seats in the House are up for reelection, and it's only about five weeks away. Ths suspicion of this writer is that the Bush administration knowingly held back its bailout proposal in an effort to get it passed without scrutiny. Remember that the Bush bill as originally presented gives exclusive control of the $700 billion to the Treasury Secretary, who Bush appoints. And there was to be no second guessing by the courts or anyone else. So the Bush administration would be empowered to reward its friends in the investment and banking communities while letting others go down the tube. Given its history of rewarding the very big and giving the short end of the stick to smaller businesses, it is likely that smaller banks thrown into crisis (at least in part by government negligence) would not see much help. In any event, they are smaller and capable of only smaller campaign support. And most interestingly, the full bill has not been publicized or reviewed much by anyone. Wno knows what skullduggery is hidden in the pages of print. It is classic Bush administration scare and ram through strategy. And it cannot be trusted. But we do seem to have a genuine financial crisis that could easily cause great hardship as it ripples through the economy. Pity politicians will play with such high stakes when the chips are ours not theirs. My colleague, attorney Terry Baggott, mentioned another interesting but overlooked aspect of the bailout proposal. Remember the bailout has the federal government buying the bad mortgage loans from lenders, etc. Under the Bush pushed Bankruptcy Reform Act, things were made much tougher for the regular people. Bankruptcy Courts have no ability to change the terms of a family's mortgage loan. But bankruptcy can wipe out the debt on a home once the home has been lost and various other conditions fulfilled. But debts owed to the federal government generally are not dischargeable in bankruptcy. So we could well have people losing their houses and still owing the federal governement on those loans - with no ability even in bankruptcy to get relief. That is another blow hidden in the Bush bailout bill to stick it to the regular Americans which has received basically no news coverage. Doesn't that make a bailout of the big boys of Wall Street feel better? There is a crisis. Something must be done. It must involve big numbers. But there must be consequences for the people heading up big financial institutions who made bad decisions. And there should be rewards for those financial executives who have managed their companies well. Once a bill is proposed which accomplishes that, the American people will be able to swallow it - like foul tasting medicine.

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Bailout Legislation - Welfare for the Wealthy? 09/22/2008 03:49:23 pm by Dan Krohn

	Emergency legislation has been proposed to deal with the credit crisis. At this point, most of the details are not generally known and have received little press coverage. No doubt the bill is several hundred pages long. Congress is being pressured to pass the legislation before the legislators have time to read it - let alone understand its implications. But based on the press coverage so far, this blogger offers some observations. The financial institutions bailout legislation proposed by the Bush administration appears to be a very nasty thing indeed. It may well be that additional action is necessary to calm the financial markets, and that legislation is needed. And it may well be that a big part of that legislation is a necessary injection of additional funds into the system. But that said, there are some aspects of the proposed plan that smell badly. Most frightening, this appears to be a financial version of the Patriot Act. The Patriot Act was passed in a frenzy of excitement and without study. As a result it included provisions, which in the opinion of many including this blogger, went too far in eliminating basic rights of Americans - and it clearly did not impose adequate controls (checks and balances) on the executive branch. Now it is no secret that the Bush administration would like to establish an imperial presidency, a modification of the historic American system by giving the president almost the unchecked power of a monarch. The history of Bush signing statements to legislation alone makes that clear. That effort was greatly furthered by the Patriot Act and its siblings and cousins. Now we have an apparent financial crisis, and once again there is an opportunity to rush through sweeping legislation without adequate review. It has been reported that the proposed legislation includes provisions to the effect that nothing done by the Treasury Department pursuant to the bill could be reviewed by the courts or any other agency. That's strong. Remember that the Treasury Secretary serves at the pleasure of the president. So presumably, the Treasury Department could bail out banks whose executives have been active Republican supporters and let other banks fail. And if Obama were to be elected, the reverse would be true. Can anyone believe that there would be no giving in to that kind of temptation (though it would probably be done in an indirect hard to trace way). A second stinky aspect of the proposed bill is that it is a generous gift to bankers and bank shareholders. The federal government is proposing to buy the stinky assets from the banks, paying far above market for them, so the banks can stay financially healthy. Though President Bush has publicly stated that this is necessary to help small business people, that's baloney. Sure, there might be some trickling down of relief of smaller companies, but there is no guaranty and no direct benefit to anyone below the top tier. Understand this - this proposal is aimed at helping big banks and their executives and shareholders to continue business as usual without regard to bad business decisions at taxpayer expense. So we have the same people who have claimed that people must be responsible for their actions and suffer the consequences (like losing a home) if they borrow too much also making sure that the lending professionals need not suffer the consequences of their bad decisions. Hypocrisy at its worst. This legislation stinks unless there is some provision for the shareholders and executives of the banks to be held accountable like anyone else. With all its flaws, and this blogger suspects there are many to be discovered, this legislation will probably pass. Recent history indicates that Congress will pass just about anything in an apparent crisis situation. And the Democrats have generally been wimps when it comes to facing down the Bush administration. If this blogger's concerns turn out to be well founded, this legislation will bring about a major change to the United States economic system, essentially moving it towards one based on capitalism for the middle class and a socialist welfare system for the very wealthy elite. Some experts have suggested that any injection of funds from the federal government be structured as a purchase of stock, perhaps preferred stock, in the entity receiving the funds. This approach at least has the effect of diluting existing shareholders' positions (which seems only fair) and gives the government a better chance of recovering the money in the future. And it avoids an undesirable aspect of the administration's proposal: rewarding poorly managed institutions and punishing their competitors which cleaned up their garbage themselves.

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The Big Bad Bailout 09/19/2008 03:29:12 pm by Dan Krohn

	This blogger cannot resist a follow-up to my post of yesterday, especially in light of the rapid changes taking place. In yesterday's entry, it was noted that no one could tell where the current financial crisis would go or how much new debt the federal government would take on. It was pointed out that in this blogger's opinion, the huge threat looming and being insufficiently discussed (which is to be expected in our short term focused society) is inflation. Not just ordinary inflation, but a really high rate of inflation. While optimistic that the U.S. will avoid the kind of hyperinflation suffered by Germany between the two world wars (and which certainly played a role in the buildup to World War II), this blogger believes we should all - especially our leaders - do a quick crash course on that historical event for the healthy sobriety it might bring. In a comment to the prior post to this blog, Ed Schipul suggested candidates for federal office needed to start talking of such things as "accountability". He's quite correct. The tough question is the picking and choosing of who to hold accountable. Well, tough for some but not those in control in Washington it seems. There the clear principle is that the smaller you are - the more accountable you should be. Cast your mind back a few months, and remember the political discussions of what ought or ought not be done to aid homeowners in deep doodoo over their mortgages. Two problems were affecting the situation at that time. One, which has dominated the news, was that adjustable rate mortgages were being adjusted upwards - quite a bit upwards, and homeowners were finding their monthly payments rising to levels never anticipated. The second was falling housing prices, which also clobbered owners. Say you want to move to another city and need to sell your house. It's a real bummer to learn that you can only sell for a price thousands less than your mortgage. Imagine selling and needing to bring and extra $25K to the closing just to pay off what you owe. Many people did and could not, and those added to the default mortgage figures. Now a few months back, many policians (including at least one presidential candidate and President Bush) were saying that the government has no business bailing out those homeowners who were so dumb as to buy more than they could afford. What is happening now? The U.S. government has bailed out Bear Stearns, Fannie Mae, Freddie Mac, and AIG to the tune of unknown billions. The U.S. national debt has more than doubled (no one knows yet what the final multiple will be) in the process, and someday somehow that debt will have to be paid. Already the Fed has been actively taking all sorts of actions to assist both investment banks and traditional banks, and there is no clear number as to the amount of debt created by those maneuvers. But today the U.S. government moves to new heights ..... or depths. Apparently it has been quickly decided that the U.S. government should insure money market funds. The money market funds which invest only in federal paper are already carrying the backing of the government, so those are not the ones affected. Now in a quick decision, the federal government is insuring money market funds which invest in corporate short term paper. Who does this help? Obviously it is of immense benefit to corporations who now get a better interest rate on their paper because the U.S. government indirectly guaranties it. Gee whiz government, would you consider doing this for the debts of the little guys? Second, it is of immense benefit to those who have invested in these money markets. Now the people who invest in corporate money market funds ought to know that they are not insured like bank deposits, just like homeowners with adjustable rate mortgages ought to know that the rate could go up. Clearly the people who have lots of moola in money market funds are more important than the family stuggling to make its monthly mortgage payment, not to mention the corporate borrowers. Now the latest talk is of quickly creating a superduper new federal agency/corporation for the purpose of buying the trashy assets of financial institutions at prices way above market. Yes, that's right, friendly reader; without your permission you are suddenly going to find yourself the owner of your disproportonate share of the fancy securities and derivatives that the wizards of Wall Street cooked up but which are worth nothing now. And this is being done with the backing of those kindly chaps who did not want to bail out stressed homeowners (and in all likelihood still do not want to bail out the fools who will vote for them). The prestigious magazine The Economist has estimated that this bailout could cost an easy $500 billion. (Would someone from the government please call me and make a nice offer on my 1997 Buick? Heck, Uncle Sam, you'll get a better return on your investment.) In this blogger's opinion, this seems like a quick and bad idea. When something is done in a hurry, it is usually done badly and it is almost a sure bet that in this kind of a rush governmental intervention some undeserving someones are gong to make out like bandits. If a crisis bailout is the short term answer, then it should be done on terms to be determined - so that the taxpayer does not get unduly shafted. Senate Banking Committee Chairman Chris Dodd in his comments on the plan stated “none of us have any idea what the details are.” Ah, isn’t that always where the devil dwells? Why not simply require these troubled companies to raise capital at the market price? A solution along these lines was suggested in a column in the Financial Times by Raghuram Rajan. Their new stock issues would be worth something. If the price is low, and existing shareholders suffer a loss -- well that was the risk they took when they bought. Surely they knew what they were doing at least as well as the borrowers on adjustable rate mortgages. Now this idea is a bit tough in that it might not inject liquidity quickly enough. But the principle is sound. In any bailout of any kind, the existing shareholders should take the hit. When all the ink is dry, the government should not be paying more than market price or lending at below market rates (and those loans should be secured - well secured). With very few exceptions, there is little talk of the executives who have gotten into all this trouble and whose companies are being saved by high finance versions of welfare (remember that naughty word), losing their jobs as part of the deal. And we do not yet know where things are going in terms of re-regulation of the financial markets. We have learned that unbridled capitalism is not a very good idea. That’s telling it like it is in straight language, so some readers might be shivering in rage. Some hate that lesson so much, that we can count on many suffering from serious denial. And count on that denial being costly. So, yes, Ed, it's about time our leaders started talking about accountability, and no doubt in time they will. But how much will be just talk? And whose account will they be talking about?

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Inflation on the Way 09/18/2008 04:35:12 pm by Dan Krohn

	The last few days have seen exceptionally frightening economic turmoil thoughout the world, but particularly in the U.S. After bailing out one big investment bank along with Freddie and Fannie, the government decided it needed to let Lehman just fail. Then it did an about face and took over AIG (potentially leaving its shareholders with some value - one wonders if they should have any hope of anything at all). The venerable firm of Merrill Lynch found itself a bartered bride in a semi-shotgun marriage. And more major financial institutions are wavering with the potential cost to the taxpayer left to the imagination. One thing is clear: the national debt has more than doubled and the total is yet to be determined. (The Fed has already been involved in major dealings effectively increasing the national debt load but subtle enough to avoid mainstream news.) Yet, the real cost to Americans has not been fully felt and will not appear clearly in taxes. There is substantial talk now of the Fed lowering interest rates when just weeks ago it was talking of raising them to combat inflation. And how will we pay that huge federal government debt bill when it comes due? What nations do in such situations is "print" enough money to pay the debt off. The problem with creating so many new dollars is that those dollars are worth less. Bingo! Inflation! Potentially Big Inflation! The average American cannot create more dollars at will, so will be left with the same number of dollars in her/his wallet - but they will buy less. This is a real danger lurking in the current economic climate, and everyone should be keeping an eye on it. In this election year, it will be interesting to see if any candidates for federal office indicate an understanding of the economic situation and the inflation risk. (One can only hope that it will be reported if any do.) It's definitely not a sexy as many other issues; it just matters much more to many more people.

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