What the latest bailout plan means
Now that the details are out, we can safely state that the US political
and financial leadership has completely sold out the taxpayers and has
done so in a manner that is startling, both in its recklessness and its
brazenness.
The reckless part I will spell out in the details below.
The brazen part is in how this is being spun
out, as if the entire plan were hatched in a hurried rush, at the last
minute, after events forced the issue. This is the spin, but it is
completely false.
Because many financial commentators, ranging from Roubini to Roach to Calculated Risk to myself, foresaw these events, we can be completely confident that these events were both anticipated and planned for long in advance. The only question left was how they were going to be 'sold' to the public. What better way than in the midst of a "massive financial panic" that required urgent action?
And now that the details are out, the plan is even more insidious than I ever dreamed.
On Friday the news started to leak out that perhaps $500 billion was the, uh, 'floor' for the bailout, and that it might be up to 60% larger than that:
The sources said the government would acquire residential and commercial mortgages and mortgage-backed securities under the proposal, which needs Congressional approval.
A Treasury spokeswoman declined to comment.
So it looks like we are being 'softened' up by Extremely Large Numbers coming in quick succession so that we'll be too numb to argue when the real plan comes out. For the record, my solution would have been very different.
Instead of buying these failed assets off of the banks for $500 billion, I would have preferred to see the banks receive $500 billion in loans, which they'd have to pay back from profits over time, while they retained the failed loans on THEIR books as a reminder to be more careful next time. Same cost to the government, but a very different message sent to reckless lending institutions.
And here are the critical elements from the real plan released yesterday (Sat., 9/20) (hat tip to Lemonyellowschwin for posting this in the comments yesterday). Full details are all the way at the bottom.
and to make and fund commitments to purchase, on such terms and
conditions as determined by the Secretary, mortgage-related assets from
any financial institution having its headquarters in the United States.
OK, this starts out kind of like I expected. The definition is a little vague, unfortunately, having stalled at "mortgage-related assets." I would have preferred that they spelled this out, because then we could have assessed which institutions were going to be helped out the most. Certainly these could have and should have been spelled out. This is vague enough to leave open the prospect that practically anything could be defined as "mortgage-related", and I am certain we will see this provision abused. 100% certain.
The Secretary’s authority to purchase mortgage-related assets under
this Act shall be limited to $700,000,000,000 outstanding at any one
time.
Whoa! Stop! What is this "at any one time" language?? This means that $700 billion is NOT the cost of this dangerous legislation, it is only the amount that can be outstanding at any one time. After, say, $100 billion of bad mortgages are disposed of, another $100 billion can be bought. In short, these four little words assure that there is NO LIMIT to the potential size of this bailout. This means that $700 billion is a rolling amount, not a ceiling.
So what happens when you have vague language and an unlimited budget? Fraud and self-dealing. Mark my words, this is the largest looting operation ever in the history of the US, and it's all spelled out right in this delightfully brief document that is about to be rammed through a scared Congress and made into law.
But, certainly, if the combination of vague language and and unlimited budget will create the conditions for further fraud and abuse, at least we live in a nation of "checks and balances," right?
Wrong.
Decisions by the Secretary pursuant to the authority of this Act are
non-reviewable and committed to agency discretion, and may not be
reviewed by any court of law or any administrative agency.
This language literally took my breath away when I read it. I am now beyond shocked at what is openly transpiring before our very eyes. I can think of NO legitimate reasons(s) for the right of review to be stripped away right from the outset. The illegitimate reason I can think of pertains to the vast riches that are going to flow into the pockets of the well-connected as a result of this act of piracy.
Many such people became fabulously wealthy as a result of picking up real estate assets for pennies on the dollar during the S&L crisis, and that model has being reproduced here.
You can count on it.
This is just another straw, thrown onto an already-collapsed camel, that confirms the fact that the US political system is broken and that the rule of law no longer applies within the US.
My final comment: If it looks like a looting operation, smells like a looting operation, and behaves suspiciously like a looting operation, it might just be a looting operation.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Full language of the act:
Section 1. Short Title.
This Act may be cited as ____________________.
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
Sec. 3. Considerations.
In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.
Sec. 4. Reports to Congress.
Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.
Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.
(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.
(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.
(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.
(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.
Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
Sec. 7. Funding.
For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Sec. 9. Termination of Authority.
The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.
Sec. 10. Increase in Statutory Limit on the Public Debt.
Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.
Sec. 11. Credit Reform.
The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.
Sec. 12. Definitions.
For purposes of this section, the following definitions shall apply:
(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.
(2) Secretary.--The term “Secretary” means the Secretary of the Treasury.
(3) United States.--The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.
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32 Comments
In such, these assets will not for the most part be sold at '10%' face value. Instead, they are likely to be sold at anywhere from 30% to 90% face value. Why, because the banks can't sell at low rates. If they did, they'd fall below their capital limits. [quote]At the same time, the financial institutions are relived of 7 trillion in bad debt in exchange for their original capital of $700 billion.[/quote] Another misunderstanding. Even if the banks are leveraged 10:1, they are still on the hook for the $7 trillion in losses. They have obligations to meet. Otherwise those huge nasty Credit Default Swaps will kick in, and various debt owners (whom the government has been protecting most religiously) will be stuck with enormous losses.
In other words, if the banks sold $7 trillion for $700 billion they'd be marking down $6.3 trillion in losses.
Which is about 12x as much listed so far. [quote]it should prevent a massive financial collapse[/quote] It can't prevent a financial collapse, because the finances were never there in the first place to collapse. What the banks are asking for is for the US government to make all the 'illusionary assets' into real assets. No matter how you look at it, if the banks have to write down $6.3 trillion that means someone is going to lose $6.3 trillion as compared to where we 'thought' we were in 2007 and most of 2008.
I'd note: More realistic estimates put the raw cash at between $1-2 trillion. [quote]While this is the end of American capitalism as we know it[/quote] Not really. Much like that financial money that 'disappeared', American capitalism was never there in the first place. ;) [quote]could even be a good deal for the taxpayers as it is likely that we would get a significant return on the investment over say the next 20 years.[/quote] Its is zero sum game. For the banks to win, the tax payers must lose. There is no other possibility. [quote]With what the gov’t is doing, do you expect some short-term stability, say over the next year or so ?[/quote] Nope. It might buy short term stability for 1-6 months. After that point the USA will probably no longer be able to borrow enough cash to buy these assets. Once people start doubting the government's ability to pay, everything will fall down like a house of cards. This is simply way to much, I seriously doubt the USA can find $1-2 trillion dollars in the environment of 2009. Don't forget all our lenders have either been burned, or are facing their own economic difficulties.
DPS - I put the Crash Course out there specifically so that people would use it however they felt like it.
Thank you for asking though.
Hopefully the new, faster server will make the experience quicker and easier for you.
Chris Martenson
MH - the "PATRIOT Act of finance".
That is a perfect description as the two Acts share everything but a similarity in volume.
Like you, I worry about whatever awaits in "Act III".
Chris Martenson
Chapter 20 ... working on it... but everytime I think I have the problems sets described, the boundaries move...
Chris Martenson
jrf29,
Even if I shared your enthusiasm for the Supreme Court as legitimate balance of executive and legislative power (sorry, but I lost that completely and irrevocably in in the 2000 election decision), I would point out that it takes years and years to get something onto the docket of the Supreme Court.
And even then they can decide to either hear the case or not.
After this looting operation has run for several years, it will be cold comfort indeed to have the Supreme Court weigh in with a decision that all this was unconstitutional.
The damage will have been done, the money all gone, and the suspects retired (or living in Paraguay).
I guess, though, my greatest barrier is contained in my opening sentence. The 2000 election ruling based as it was (supposedly) on the 14th amendment was so far off base, and so utterly without merit, that I have not yet been able to recover even the slightest sense of respect for the Supreme Court.
Since then, I've watched the court "divide their rulings", sometimes 5-4 this way and sometimes 4-5 that way, with the common denominator always being a validation of the expansion of government over individual and states rights. Kelo V New London being a perfect example. There a supposedly "liberal" majority decided that municipalities could seize private property for "public use" even if that public use was "higher taxes from that piece of property".
So, yes, I tend to take the wording of these documents very seriously and do not, as you do, assume it's just "boilerplate" language. It's there for a reason and it will be used for the reason it was intended.
Chris Martenson
It's kinda like a mortgage when the next great depression hits. There is no way the government will tolerate having millions thrown out of their homes (mass rioting would occur, and with these mortgages in the hands of the government it is more likely they will forgive them), and there is no way people will be able to pay their mortgages in a depression. So I can see governments decreeing a moratorium on all loan payments. Essentually wiping out everyone's debt. You just don't want to be at the beginning of the crash, and get tossed out, but hang on long enough for the moratorium.
My letter read, ---
Regarding $700 billion mortgage-asset bail-out: There are three serious flaws in the proposal put forth this week-end.
1. Sec. 6: the language "at any one time", see below:
"Sec. 6. Maximum Amount of Authorized Purchases. The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding AT ANY ONE TIME."
This is unacceptable: this means that after, say, $100 billion of bad mortgages are flushed through this toxic waste dump another $100 billion can be bought. In short, these four little words assure that there is NO LIMIT to the potential size of this bailout. This means that $700 billion is a rolling amount, not a ceiling.
2. Sec. 8: is it even CONSTITUTIONAL to avoid all oversight and review? This seems to absolutely invite fraud of the type rampant in the Savings & Loan bail-out. What's to prevent people from selling their friends assets for pennies on the dollar? What's to prevent people from disposing of loans that aren't really bad, in effect forgiving loans they made to friends?
See below:
"Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and MAY NOT BE REVIEWED BY ANY COURT of law or any administrative agency."
3. Why do this as a bail-out at all? Why not put it through bankruptcy court where the equity investors will get nothing and performance-based compensation packages will suffer and companies will be punished for their failings? Sure, form a special bankruptcy work-out. But keeping the companies as going concerns and off-loading their errors to the government is wrong on so many levels. For one thing, it's not just a taxpayer bailout, it's a huge threat to our over-burdened currency already, nearly guaranteeing the horror-show of hyperinflation.
For a crash course on the economy, and why it is going to be different in the next twenty years than it has been in your entire life-time, I highly recommend Chris Martenson's course, to be found here:
http://www.peakprosperity.com/crashcourse
You are dabbling in the most serious legislation of your life this week-end. Do not misunderstand this: it is every bit as bad a proposal as when Bush wanted authorization to go into Iraq. He does NOT SERVE US. Please make sure that YOU do.
-----------
The mortgage bailout deal would essentially make the taxpayers liable for
bad mortgage lending by private companies, but federal officials argued that
this was the best way of stemming the credit crisis. Investors worldwide hold
$5 trillion in debt backed by the two firms, and their failure would shake the
global economy.
In this current economic situation, there needs to be some kind of viable
way to repair credit lines and get the economy moving again.
Treasury Secretary Paulson’s Troubled Asset Relief Program, or
TARP, doesn’t seem to cover enough. The FDIC’s
chairperson, Sheila Bair, has set up her own strategy; a $24 billion plus plan
for the 1.5 million homeowners facing foreclosure. Her idea is to give a
stimulus of $1,000 to lenders for each renegotiated loan to owners in danger of
heading to foreclosure. In the event of default, the FDIC will
take on up to half of the burden. Paulson hates it, straight away, and
proclaims that its just more spending that will lead to the bankruptcy of the FDIC.
Some others view Bair’s actions as one of the first real attempts to help repair
credit of the banking system and get cash flowing again.
Click to read more on Credit Repair
Let me get this straight in simple terms:
1. Banks make bad loans and bundled them to make them look good
2. Sell bundles (derivatives) to people that just flat out did not know what they where buying
3. Market keeps selling these derivatives kinda like playing hot potato.
4. Many banks took out insurance to protect from being burned through AIG.
5. When the music stopped ((loans defaulted at an alarming pace)), the people with the hot potatoes where getting burned.
6. The Executives/owners of the "Big 5" banks ((the ones that are too big to fail and the ones that give together $1 to $2 million to many of our elected officials in the form of campaign funds not to mention all the perks from the lobbyists)) if by law they went into receivership would lose a lot of money and ipsofacto so do our elected officials, therefor all these new bills and acts to protect "some" banks have been crammed through our government.
In the meanwhile, I think the count is 21 other banks have closed plus 16 or so credit unions and went through the normal process with the FDIC.
7. During all this the government and the Federal Reserve have pumped Billions if not Trillions of dollars through AIG to help them pay for the insurance they issued to the "Big 5" banks and other central banks around the world (Germany and England to name a couple) at 100% the value of the insurance.
NOTE: I need to remember that the money from the Fed is loan to the USA at interest. We get to pay that too.
8. The acts in place allow the "Big 5" banks to sell to PI's (privet investors) on auction. The Treasury (Government) match what the PI puts in and the Federal Reserve covers the rest ((oh yeah with interest to us)).
9. With the recent lose of Mark to Market, the "Big 5" can auction these "investments" at any price they want too.
10. Furthermore, the PI's can be front companies owned in part by the "Big 5" even all of them at once, so if there is a lose the "Big 5" will only lose a very small % through these companies. And these companies can be funded by bailout loans from October last year or from AIG money. The "Big 5" can even boost that they paid back last years loan with the new plan's money only losing a faction when they should have lost, around 30 to 70%.
If there is and most-likely will be a lose the treasury and the Fed take the hit, leaving us to pay back the money to the Fed with interest.
11. Last but not least, I have seen nothing in all that I have read that the PI's need to sell immediately. This in my opinion means the Fed and Treasury will not show a lose until the PI's sell them. If sold slowly over alot of time or held until things get better, the Treasury and Fed may not see such a hard lose at once or lose much less. We just pay interest on the loan from the Fed till time of sale. Then the Fed can absorb the money back slowly without letting inflation go too crazy or spike too fast.
If the PI's sell all at once for whatever they can get, game overTreasury takes a hung hit on the books now ((more taxes or more money from the Fed, more interest)), and the Fed balance sheet goes off the charts ((if the sale can pay back the loan, we pay no more interest on the money lowering money in the system, hence not paying for a dead horse)). This will send our money into high inflation or worse.
Have we not given the bankers the SHTF button? They can press it at anytime with no lose to themselves or much less intensive than main-street will see.
I really want to hear others opinions on this one, maybe I am missing something. Maybe this is too simple. Worse off, maybe this is right.
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