Gargantuan Bailout: The Sequel

by Dollars and Sense

This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.

The updated Treasury bailout plan has now been submitted to Congress, and indications are that it will pass, though it seems that many lawmakers have yet to read the bill. The bill contain important improvements on the one that was rejected last week: far more oversight over the disbursement of funds--and of the ability of the Treasury Secretary to dispose of these funds--curbs on participating firms' CEO pay, equity investment for the public in exchange for the lifeline, and aid for besieged mortgage borrowers. Here are the details, courtesy of Reuters:
The proposed legislation would disburse the $700 billion in stages. The first $250 billion would be issued when the legislation is enacted, while another $100 billion could be spent if the president decided it was needed. The remaining $350 billion would be subject to congressional review.

Institutions selling assets under the plan would issue stock warrants to the government, a step intended to give taxpayers a chance to profit if markets recover.

The plan also would let the government buy troubled assets from pension plans, local governments and small banks.

In response to a clamor for limits on executive pay, no executives at participating firms could get multimillion-dollar severance packages -- known as golden parachutes.

An oversight board of top officials, including the Federal Reserve chairman, would supervise the program, while its management also would be under close scrutiny by Congress' investigative arm and an independent inspector general.

The government could also use its power as the owner of mortgages and mortgage-backed securities to help more struggling homeowners modify the terms of their home loans.

So is this something we can support? Given the atrocious failure of Congress to monitor any of the administration's many blatant crimes over the last few years, we should be extremely skeptical, but it is a step in the right direction, especially given the unpopularity of the administration and the clear disgust shown on the part of ordinary citizens for the idea cutting the financiers any slack. Ultimately, though, this bill has one objective, and one alone: to unclog global money markets. What can it accomplish on this score?

This is the big question. The package was rushed through precisely to avoid turmoil on Asian markets which are opening now, and to prevent their spreading to Europe and the UK in a few hours time. And on this score, things don't look good, package or no. Again, from Reuters:
While Washington's $700-billion bailout package is crucial in tackling the worst financial crisis since the Great Depression, doubts remain as to how it could immediately thaw the frozen money and credit market.

This week's data highlight is the U.S. employment report for September but the indicator is unlikely to fully capture the massive shock to the labor market, broader economy and consumer confidence of the events of the past two weeks.

Interbank money markets are experiencing historically high tensions after the collapse of Lehman Brothers, Washington Mutual and the firesale of Merrill Lynch and UK bank HBOS, while a global ban on short selling has caused trading volumes in major stock exchanges to dwindle.

The liquidity crisis is spreading to the Arab Gulf, other emerging markets and Scandinavia, and the U.S. commercial paper market, a vital source of funding for many companies' daily operations, has shrunk to its smallest in almost two years.

All that has backed a stampede into safe-haven U.S. government debt that has sent short-term yields to near zero as prices rocketed.

"It's the most dysfunctional market I can remember in my career of 20 years," said Chris Iggo, chief investment officer at AXA Investment Managers. "It is the complete questioning of the very fundamentals of how the financial system works. The real key to everything we do is a matter of trust and there is evaporation of trust."That's why banks are not lending to each other and people are worried about the creditworthiness of debt and there's a lack of belief in the ability of equities to deliver the earnings that analysts are forecasting."

This is the crux of the problem: that the crisis has gone so far beyond the US subprime mortgage sector that even extraordinary attempts to clean up that sector, some pushing the lengths of constitutionality itself, may remain seriously behind the corrective curve given the kind of financing it enabled, and which is still, in important ways--especially in the money markets--operative. And the issue of constitutionality is even becoming rendered irrelevant. Just today, news comes from the UK of the nationalization of yet another bank, Bradford and Bingley; and from the continent, the Belgian Fortis seems about to go under. Meanwhile. a deathwatch of sorts is being placed over Wachovia here in the US. It seems a mere matter of time until the US taxpayer may have to play a role in bailing out foreign multinational banks, adding even more stress on a federal balance sheet that has seen its liabilities almost double in the last fortnight or so (but everything depends on what is ultimately recoverable on the asset side). So the answer is: the plan is yet another attempt to stop the rot: we're still not out of the lows yet, as Reuters said.

Perhaps it's inappropriate to close on a note of levity in the midst of all this, but one news item item this weekend was too good to let pass by: it seems hedge fund managers in the City of London have become incensed by the Anglican archbishops' of Canterbury and York denunciation of their role in the current crisis, rightly pointing out that essential pension funds of the Church of England are beneficiaries of the services of the same funds. One went so far as to assert the following: "Short selling is the pursuit of truth." As was the case of jesting Pilate, we are noe justified in wondering what this truth actually amounts to.

Labels: bailout, financial crisis, Henry Paulson

 

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9/28/2008 02:21:00 PM