Meta-Blog

SEARCH QandO

Email:
Jon Henke
Bruce "McQ" McQuain
Dale Franks
Bryan Pick
Billy Hollis
Lance Paddock
MichaelW

BLOGROLL QandO

 
 
Recent Posts
The Ayers Resurrection Tour
Special Friends Get Special Breaks
One Hour
The Hope and Change Express - stalled in the slow lane
Michael Steele New RNC Chairman
Things that make you go "hmmmm"...
Oh yeah, that "rule of law" thing ...
Putting Dollar Signs in Front Of The AGW Hoax
Moving toward a 60 vote majority?
Do As I Say ....
 
 
QandO Newsroom

Newsroom Home Page

US News

US National News
Politics
Business
Science
Technology
Health
Entertainment
Sports
Opinion/Editorial

International News

Top World New
Iraq News
Mideast Conflict

Blogging

Blogpulse Daily Highlights
Daypop Top 40 Links

Regional

Regional News

Publications

News Publications

 
My favorite proposal for helping financial institutions-Updated
Posted by: Lance on Wednesday, October 01, 2008

I do believe we should be doing something as a nation, through our government, to avoid the not insignificant chance of a total financial meltdown. I have seen several things proposed that I find interesting, and I will get into them and other longer term issues in coming days. I had hoped to address this all comprehensively, but time just isn't allowing that, so let us do so piecemeal.

Today I would like to endorse one proposal that aligns exactly with my thoughts on this, which is we need to recapitalize banks in a more effective, less arbitrary manner while protecting taxpayers and homeowners as well.

 
John Hussman (a long time favorite of mine) has written an open letter to Congress that unfortunately few Congressman or women are likely to read, and it reminds me of the Chilean experience McQ posted about here. Nor is it being debated in the press. This is sad, so hopefully whether the new bailout bill passes or not, we can see our approach restructured along these lines eventually:
1) Public funds must function to increase the capital of distressed financial companies, not simply to take bad assets off of the balance sheet at market value (which may improve the "quality" of the balance sheet, but does nothing to improve the capital cushion and therefore little to avoid future runs on the institution).

2) In return for these funds, the government should NOT take equity (which is a subordinate claim and also creates potential conflicts of interest), but instead should take a SENIOR claim that precedes not only the stockholders but also the senior bondholders in the event the company defaults anyway. Congress may need to make some modification to existing bankruptcy law or provide for expedited bondholder approval to do this, but essentially, the government's claim should be subordinate only to customers in the event of default, and senior to both stockholders and bondholders. However, it should also be countable as capital for the purposes of satisfying bank capital requirements.

3) Ideally, the rate of interest on such funds should be relatively high (which will encourage these firms to substitute private financing as soon as possible), but actual payment should be made once the firms are again profitable so that the payment burden does not weaken them during the present recession.

4) The bill should allow for expedited bankruptcy resolution for these institutions, so that in the event of failure, the "good" bank (all assets and customer liabilities, but excluding debt to bondholders) can be cut away and liquidated to an acquirer as a "whole bank" sale. For nearly all of these institutions, the debt to bondholders is far more than sufficient to absorb any losses even in the event of bankruptcy. The current difficulty is that the bankruptcy process itself draws out the process of taking receivership, cutting away the good bank so that it can be sold to an acquirer, and delivering the proceeds as a residual to bondholders. Streamlining that process is one of the best ways to ensure that the failure of one institution does not have "systemic" effects.

5) To assist homeowners, the bill should allow for a reduction of mortgage principal during foreclosure, but the mortgage lender should also receive a Property Appreciation Right (PAR) that gives the original lender a claim on future property appreciation up to that original mortgage amount. In other words, the homeowner receives a substantially lower mortgage balance and payment burden now, but the lender stands to be made whole over time through property appreciation rather than immediate burdens on the homeowner to make payments.
I think number 5 is key. It helps people who want to stay in their home, but the PAR allows for the bank to have a more valuable asset on their books than the value of the renegotiated mortgage itself. Note: the PAR needs to stay with the property, so if it is sold the buyer still owes the mortgage company. It would be an assumption in other words. This way the pain is shared by homeowners and financial institutions, while market pricing still is allowed to work.

One of the issues which has bothered me throughout this crisis has been the bailout of senior bond holders in most of the interventions so far. The rationale has been that customers and counterparties were being protected, bond holders merely were being brought along for the ride. Lucky them.

However, that has not been true in any of these bailouts with the possible exception of AIG. If these institutions had been liquidated in an orderly manner there were more than enough assets to cover counterparties and deposits. John does a good job of educating us as to why that is true and expands upon that in his letter, so read the whole thing. More on that can be found here in, September 29, 2008 - You Can't Rescue the Financial System If You Can't Read a Balance Sheet:
1) as the assets of a financial company lose value, the losses reduce the asset side of the balance sheet, but also reduce shareholder equity on the liability side;

2) as the cushion of shareholder equity becomes thinner, customers begin to make withdrawals;

3) in order to satisfy customer withdrawals, the financial company is forced to liquidate assets at distressed prices, prompting a further reduction in shareholder equity;

4) go back to 1) and continue the vicious cycle until shareholder equity goes negative and the company becomes insolvent.

Let's return to the basic balance sheet of a typical financial company before the writedowns:

Good Assets: $95
Questionable Assets: $5
TOTAL ASSETS: $100

Liabilities to Customers: $80
Debt to Bondholders: $17
Shareholder Equity: $3
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $100

Now let's write down the questionable assets - not all the way to zero, but to $2:

Good Assets: $95
Questionable Assets: $2
TOTAL ASSETS: $97

Liabilities to Customers: $80
Debt to Bondholders: $17
Shareholder Equity: $0
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $97

This shortfall of protection on the liability side of the balance sheet is what causes a run on the institution, because once shareholder equity is gone, the only way to get at the debt to bondholders is for the company to declare bankruptcy. The concern has been that continuing bankruptcies would throw the whole financial system into disarray, especially for investment banks having lots of counterparty relationships with other institutions. But the reality is that for nearly all of these institutions, the cushion of debt to bondholders has always been more than sufficient to protect customers from losses even in the event of bankruptcy.

What the financial system has needed most has been for Congress to streamline the bankruptcy process for investment banks, so that in the event of failure, the “good bank” (assets and liabilities, ex the debt to bondholders) could be cut away quickly and liquidated to an acquirer, leaving the proceeds as a residual for the bondholders. Indeed, that's exactly how it works for regulated banks. What investors overlooked in last week's panic was that we actually saw the largest bank failure in history – Washington Mutual – with absolutely no losses to customers or the U.S. government, precisely because the good bank was seamlessly cut away and sold to J.P. Morgan, wiping out shareholder equity, preferred equity, and subordinated debt, with partial repayment to the bondholders. Snap – just like that.

Now, let's go back to the previous balance sheet. The Treasury plan seeks to buy up those questionable assets and thereby protect the institution against failure. Problem is, suppose the Treasury buys those questionable assets at their going value of $2. Here's the result:

Good Assets: $95
Cash Proceeds from Sale of Questionable Assets to Treasury: $2
TOTAL ASSETS: $97

Liabilities to Customers: $80
Debt to Bondholders: $17
Shareholder Equity: $0
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $97

Does this transaction protect the institution against failure? No! If you buy the bad assets off the balance sheet at their market value, nothing changes on the liability side! You may have improved the “quality” of the balance sheet, but you've provided no additional capital. At best, you've allowed the bank to liquidate its assets more easily to meet continuing customer withdrawals in the vicious cycle described above.

The only way that buying the questionable assets will increase capital on the liability side of the balance sheet is if the Treasury overpays for them.
Hussman also makes a good point about Warren Buffett's investment in Goldman Sachs:
As a side note, a lot has been made of Warren Buffett's investment in the senior preferred stock of Goldman Sachs. But it's notable that Buffett invested in Goldman only upon the conversion of Goldman to a bank holding company, which puts it under a different regulatory structure that gives it access to the Fed window. Goldman's balance sheet has $40 billion of shareholder equity that would have to be drilled through before getting at the preferred. Evidently, Buffett believes that Goldman's asset mix is diversified enough, and light enough in mortgage assets, that Goldman won't take a major haircut on its entire (largely hedged) portfolio of assets.

Buffett's investment may reflect confidence in Goldman, particularly with a government backstop on whatever questionable assets it does own, but if anything, it suggests that the government should have gone the same route – namely, provide capital in return for a financially viable security that is senior to common shareholder equity, have it accrue a relatively high rate of interest, and allow it to be repaid early (Buffett's preferred is callable by Goldman) as soon as the financial institution can secure cheaper financing.

Instead, the government is taking on financially non-viable securities and warrants on common equity, while failing to improve the capital position of these financial companies at all (unless it overpays). Taxpayers will not make money here.

As Congressman Scott Garrett noted to taxpayers on Sunday, "This morning we should be very much alarmed. Obviously, Washington is not listening to your wishes. Those who used to work for Goldman Sachs will support this deal. Those who have blocked reform in the past will support this deal. I will not support this deal." I couldn't agree more. This is not a good deal, because it will waste taxpayer money without addressing the fundamental solvency problems.
That last comment is very important. There are many problems with the current approach from a ethical, ideological (from all parts of the spectrum) and long term viewpoint. All of which might make sense anyway of the plan were in any way likely to be a good short term solution. The problem is that it isn't.

I'll put up a few twists on John's proposal in the coming days, which some will find more or less appealing. However, it should be cautioned, none of this will likely avoid pain, a recession or poor asset performance for some time. This will be years in the fixing, and it will be a drag on growth for some time. Shuffling the burdens to allow for price discovery and functioning markets will avoid disaster, closing weak institutions, which needs to begin in earnest, will allow healthier institutions and new market participants room to grow. It will not change the fact that the losses exist, that they will have to be paid for, that the nominal and real wealth of the US will have shrunk, that consumers and our own economy will need to delever (reduce debt) and all the pain which that entails.

Update:My last entry in the comments addresses several misconceptions about this proposal, so please refer to them. I will summarize:

  • This proposal does not endorse buying the bad assets. They stay with the institutions.


  • This proposal specifically rejects government ownership of financial institutions.


This proposal is not a bailout, but a workout. The US government would only loan to institutions that have enough assets to cover shareholder equity and bondholder liabilities, who in the case of default would only get whatever is left over. Thus, taxpayer risk would be minimal, and we would be compensated with high interest rate payments. To give an example, had we done this with Bear, Lehman, IndyMac or WAMU the taxpayer would have come out whole in each instance. Shareholder equity and bond holder liabilities we were senior to were more than adequate to cover the loan in each case. That is true even though we might not have given them the loan because they wouldn't have qualified under the terms of the proposal. It is really for the banks not under such duress. Some of their balance sheets were too poor to be worth trying to save.
 
TrackBacks
Return to Main Blog Page
 
 

Previous Comments to this Post 

Comments
We’re cutting directly to the chase here, kids:"I do believe we should be doing something as a nation, through our government, to avoid the not insignificant chance of a total financial meltdown."And I do not.

Now: since it’s my money you’re talking about, you tell me which one of us has the moral authority in this.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
If we were living in a world where you actually got to decide what your money will be spent on I might say you.

However, as this crisis gets worse I promise you that you and I will be required to pay up anyway, and for things I am far less enthused about. Loaning money at high interest with a senior position in these entities means we have little risk as long as it only applies to those institutions which have the capital cushion to survive. Your money under this plan is pretty damn safe. Without one, it isn’t.

Congress is going to take your moral authority and put it where the sun don’t shine.
 
Written By: Lance
URL: http://asecondhandconjecture.com
"If we were living in a world where you actually got to decide what your money will be spent on I might say you."
That is a very grave error. The correct answer to the question is obvious, regardless.

I don’t think you understand the full import of the question, Lance. And it goes far beyond this week or even this year.

All will be made clear to you sooner or later.
"Congress is going to take your moral authority and put it where the sun don’t shine."
In my particular case, you’re very wrong.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
The subprime poison is already in the system.

The bailout suctions as much of that poison out of the system as it can and puts it where it belongs: with the government that forced it into the system in the first place.

Let the government busy itself working out its own poison. Let it get confused or succeed or fail in that task.

Hopefully, just as Reagan’s national debt defeated Clinton health care in 1993-94, this bailout (of Barney Frank’s debt) will make "universal health care" and other "government sponsored enterprises" (in both the official and unofficial meaning of that term) less likely.

That’s my rosey scenario. Let government tie its own hands with the rope it wove. It’s the best deal we’re going to get.
 
Written By: Martin McPhillips
URL: http://newpaltzjournal.com
"Let the government busy itself working out its own poison. Let it get confused or succeed or fail in that task."
Martin? I’m begging you, man.

You know better than that.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
Martin? I’m begging you, man.

You know better than that.
I don’t think that there’s anything available that’s better than that formula: the government caused the problem, let it have it back.

If it were to take all of those subprime assets and bulldoze them that’s fine with me; it can become the landlord if it wants. It can turn them into neighborhood brothels.

What they are likely to do, however, is gradually sell the assets back into the market.

The important thing is to, first, let the government get its crap out of the financial system.

The harder part, whatever they do with the assets afterwards, will be to stop the practices that they forced into the market that got us here.

We have a $15 trillion economy that’s going to more than double over the next 20 years. This "bailout" will look like pretty small stuff by then. And between now and then, the real battle will be won or lost with the "progressives" over matters other than this one.
 
Written By: Martin McPhillips
URL: http://newpaltzjournal.com
"We have a $15 trillion economy that’s going to more than double over the next 20 years."
I say that’s delusional. Wanna bet?

Look, mate: socialist insecurity is going to kick that in the ass all by itself.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
Having spoken my own peace on this at length, I can only add to you two, let’s hope we’re all around to see how that bet comes out.
 
Written By: Bithead
URL: http://bitsblog.florack.us
What bet?
 
Written By: Lance
URL: http://asecondhandconjecture.com
Is this satire? This looks to be just like Soros’s plan.

The same Soros who looted Europe and then lobbied to pass legislation that put an end to the exact same financial looting he pulled. Moveon.org Soros. That Soros.

I don’t trust any bailout plan at this stage of the game. Especially from Soros.

Not enough time has passed, people.

 
Written By: Meh
URL: http://www.yahoo.com/
The "looting" in this case was done by Congress, through Fannie/Freddi, CRA.

The "loot" is in the hands (or in many cases abandoned now) by those for whom the looting was done by the Congress — those who bought houses on terms that no lender would have offered without the government defining lending practices down.

If the rotten Soros gained any benefit from it, I wouldn’t be surprised. But it was the Congress and its governmental phantoms Fannie and Freddie that initiated the mess.
 
Written By: Martin McPhillips
URL: http://newpaltzjournal.com
" so let us do so piecemeal"

That works out well for those of us with short attention spans.


"The bill should allow for expedited bankruptcy resolution"

I doubt that any significant shortening of the process is possible. There is only a finite number (Deo Gratia) of lawyers and accountants to do the necessary work. Perhaps an ’express lane’ of some sort would be possible, for those entities with relatively simple structures.


"but the mortgage lender should also receive a Property Appreciation Right (PAR) that gives the original lender a claim on future property appreciation"

In other words, a lien.

" This way the pain is shared by homeowners"

I don’t see any real pain here. They may lose some theoretical gain on future sale, but this is more than made up for by the reduction in their mortgage payments.
I also don’t think the complications in taxes, bookkeeping, etc. make this worthwhile.

****************************

" you tell me which one of us has the moral authority in this"

You may have the moral authority, and I sincerely hope you enjoy having it, but...

Sorry about that, as we used to say.


************************
"puts it where it belongs: with the government that forced it into the system in the first place...
...Let the government busy itself working out its own poison"

Uh, I think that would be us. S*** rolls down hill, dontcha know.
 
Written By: timactual
URL: http://
"You may have the moral authority, and I sincerely hope you enjoy having it, but...

Sorry about that, as we used to say."
Look: you don’t have anything that serious to apologize over. I think you’re a good man, Tim. You don’t really know what you’re doing with your politics. If you did, you wouldn’t do it.

Let’s all just be clear that the severance of morality and politics is a fact. Anyone who doesn’t understand that that’s a very big deal is just wasting history.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
I don’t see any real pain here. They may lose some theoretical gain on future sale, but this is more than made up for by the reduction in their mortgage payments.
I also don’t think the complications in taxes, bookkeeping, etc. make this worthwhile.
Then they don’t have to take advantage of it if it isn’t worthwhile.

Of course they would enjoy the reduced payments, that is the point, but they do lose future gains, which if they plan on staying will amount to quite a bit, and their original equity with no hope of recovery unless the house appreciates beyond the original loan value. This isn’t a bailout, it is a workout.

Lenders however get a chance to recover their original loan through the initial refinance and the rest from appreciation. Now they just get to try and sell in a glutted market at fire sale prices. They will be lucky to recover 40%. Or, they can refinance at a lower payment structure and get nothing but a loss. If I were a lender this seems much more palatable.

Look, all plans are going to be difficult, have costs, and will not solve our economic problems. We can however ameliorate them a bit, avoid extreme outcomes and place the costs on those who should bear it, lenders and individual homeowners.

Our congress is pushing through a program that will not work, and accrues directly to the bottom line of those who have profited from this.
 
Written By: Lance
URL: http://asecondhandconjecture.com
Is this satire? This looks to be just like Soros’s plan.
Please enlighten me as to how this is anything like Soros’ plan?

Also, while any plan has some things we might not like, exactly what is it that doesn’t appeal, and why?
 
Written By: Lance
URL: http://asecondhandconjecture.com
Billy, this has been my problem with you. You’re tactics are the same as Mkultra’s: either we agree with you, or we’re idiots. Far more intelligent people than you or I have been at opposite ends of politics before, and some have been right and wrong at different times, BUT IT DIDN’T MAKE THEM ANY LESS INTELLIGENT. The arrogance and condescension you display is as nauseating as Erbs at points.

Disagree all you want, but we have enough jack @sses here without you adding to it. Talk to us, not down to us.
 
Written By: Joel C.
URL: http://
Look, all plans are going to be difficult, have costs, and will not solve our economic problems.
Well, hey. . . if we can’t solve the problem then let’s at least save the euro! Personally, I see little need to prop the euro up with shrinking dollars.
We can however ameliorate them a bit, avoid extreme outcomes and place the costs on those who should bear it, lenders and individual homeowners.
Sorry. Wrong. Today’s lenders are not the problem. Yesterday’s lenders were not the problem. The problem is not with defaulting mortgages. The problem was with government-backed purchases of mortgages that were high risk and the subsequent roll-up of these mortgages into securities that then, by DEFINITION because of the risk of the underlying tranches, were sold fraudulently (even if legally). The problem is with MBSes, CDOs, and CDSes being bought, sold, and traded in manners designed to fraudulently (even if legally) pump up volumes to pad bonuses.

You’re suggesting government "ameliorate" a problem that was government-created to provide government-lootability. And that, all with taxpayer or investor money.

No way. No bailouts. No buy-ins. No buts.

Some one needs to hang.
 
Written By: Arcs
URL: http://
oh, and for the record, I tend to agree with you more often than not, and it sometimes makes me rethink my positions because of it.
 
Written By: Joel C.
URL: http://
"Billy, this has been my problem with you. You’re tactics are the same as Mkultra’s: either we agree with you, or we’re idiots."
To begin with, get your facts straight: that little idiot has never made an argument. I do it all the time.

This is not about me. This is about facts. You can "agree" with them or not as you wish, but that’ll make it about you at that point.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
What bet?
I say that’s delusional. Wanna bet?
 
Written By: Bithead
URL: http://bitsblog.florack.us
"Look: you don’t have anything that serious to apologize over"

Irony. I guess you had to be there. ;b


"Let’s all just be clear that the severance of morality and politics is a fact."

Yeah, that’s been pretty clear for several thousand years of recorded history. I am pretty sure it was true before then. It is a big deal in the sense that war, plague, pestilence, and death are big deals. Just another of life’s little speed bumps.

*****************

"but they do lose future gains,"

All of them?

"and their original equity"

Where did that come from?

There is also the time value of money to consider.
All in all, I am a great believer in simplicity, and this ain’t it. I am not particularly concerned that some homeowners may take a hit. There are already procedures to renegotiate mortgages, so why complicate things?
 
Written By: timactual
URL: http://
To begin with, get your facts straight: that little idiot has never made an argument. I do it all the time.
fair point

This is not about me. This is about facts. You can "agree" with them or not as you wish, but that’ll make it about you at that point.
the same facts that were argued back when they were written, by the same people that wrote them?

The fact is because of the society and laws we live in, every bit of what’s going on is legal. The fact that it’s going through the proper channels (the current Senate bit notwithstanding)makes that irrefutable. You’re specifically talking about what you consider to be right and wrong, since you’re very first dissent proves it:
Now: since it’s my money you’re talking about, you tell me which one of us has the moral authority in this.
It’s my money, too. And Lance’s. And Erb’s. And Mkultra’s. and every other person that pays taxes. How we spend that money we leave in the hands of the individuals we elect to represent us, but that will never guarantee that it will be spend 100% of the time in a method that we approve of.

Half this country disapproves of the War, does that mean we defund it?

Your entire premise is flawed because it ignores the basic fundamental system we live under. You willfully ignore that and give us ’well, I pay taxes and I don’t like it, therefore it shouldn’t be done’.

Doesn’t work that way, Billy, no matter how much I may agree or disagree.
 
Written By: Joel C.
URL: http://
Please enlighten me as to how this is anything like Soros’ plan?
My apologies for the drive by comment. I’ll flesh it out a bit more. The first similarity would be the "recapitalizing" of the banks/institutions/etc. and then now calling it an "investment" because the Government has controlling stock or better terms on the assets instead of what it still is "a bailout".

On principle I don’t want the Government having more controlling interests in banks or anything else.

As for why I don’t like it, point #1, I think it’s disingenuous to say that the original bailout plan is just taking the bad assets off of the balance sheets and not recapitalizing. How do these assets get off the balance sheets? It doesn’t disappear in a write off. The bankers essentially get their money bank for these bad loans. How is that money not available for them to do whatever and/or leverage? How is that not recapitalizing and further that 5% disappears from the "balance sheets"?

"Price discovery" only highlights the BIG problem. Everyone knows this. All of these bailouts are trying to hide and absorb this on the backs of the taxpayers, so they have to do that in one fashion or another. Again, I feel this is a disingenuous reason. The bailouts plans aren’t going to be surprised by this gotcha, all plans are trying to insulate it.

But more to the point, which way do we want our screwing? Do we want the Government to hold questionable assets long term in the hopes they go up, or do we want the Government to hold controlling stock in companies that still have bad assets...that will eventually get auctioned off on the cheap to the likes of Soros who has the cash to take advantage of such a situation.

Anyway, #1 seems like false justification for #2-5 which is essentially further shuffling, reorganization, and sweeping under the carpet.

I mean PAR assets? Are still the same tainted/poison assets. Why should a "home owner" be able to then have a $200k (post PAR bailout) mortgage (originally $300k pre-crisis), sell at $250k to someone (say me) in 2010 or 2015, whenever. Sure give the $50k to the Government (for their investment) and then I sell it 2025 at $350k, but I only get $50k out of it after the Government takes the rest of theirs. While it appears to be a $50k interest free discount for a few years on a home worth $300k.

Why would I do this? Why would anyone?

Why don’t I go buy an untainted house for $250k and get all of my inflationary protection money’s worth from the house?

Would I be performing a patriotic duty buying a PAR house or something?

I don’t get it.

For me? No on the bailout plan. The resulting turmoil is the price I pay for not riding my representatives like a donkey to stop this earlier, not paying attention, and my general nonchalant apathy.

I’d rather pay the piper now and the people in these banks should go to jail. They knew this was going to occur. Only when there are sufficient consequences for risk taking will the market through newly enlightened self-interest respond in a more measured and conservative way.

Right now, all of these bailout ideas tell me is that I should quit my day job and go commit a crime so large that there won’t be laws on the books to punish me enough.
 
Written By: Meh
URL: http://www.yahoo.com/
"It’s my money, too. And Lance’s. And Erb’s. And Mkultra’s. and every other person that pays taxes. How we spend that money we leave in the hands of the individuals we elect to represent us,..."
In a free country, you could all take your money and pile it up in the front yard and set fire to it and no one would stop you. No matter what, not one of you has a right to compel others to join you.

That just doesn’t matter to you, does it? Don’t hand me any of that "society" jazz. I’m asking you, on the authority of your own mind.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
That just doesn’t matter to you, does it? Don’t hand me any of that "society" jazz. I’m asking you, on the authority of your own mind.
except what I, as one person, doesn’t matter a fig if I’m in the minority and cannot sway others to my point of view, Billy.

The difference between us and a communist state is that we have the luxury of coming to a consensus (in the eyes of communists). We debate and then vote, and then a decision is made.

You can’t pick and choose, unfortunately, because no country could function in that way (at least no country with the luxuries we have and you seemingly take for granted). I don’t have children, yet I pay taxes for public schools. I’m not in the military, but my money goes to fund them, and while I may agree with their mission, my friend, who doesn’t, STILL pays for a mission he doesn’t believe should even be funded.

You wanted to talk about concrete facts? That’s it. That’s concrete. That’s real.

Are we talking about what we would like or what is, because those are two very different arguments.
 
Written By: Joel C.
URL: http://
"You wanted to talk about concrete facts?"
Go read through it again, Joel. I never said that and I am most certainly dead-set against talking about "concrete facts" with someone who does not integrate them into concepts by way of principles.

That’s nearly the most corrosive thing I can think of doing with my time, short of beating Scott Erb in the head. I could do that with a child who doesn’t know what to do with a whole bagful of discrete facts and can’t add them up.

Among other things, you’re telling me that I should be happy if I get to choose my master.

I cannot tell you how mal-interested I am in that.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
Among other things, you’re telling me that I should be happy if I get to choose my master.

I cannot tell you how mal-interested I am in that.
no, I’m telling you how the system works. Whether or not you’re happy with it is you’re own affair.

But, again, I’m dealing with reality not emotions.
 
Written By: Joel C.
URL: http://
Understanding people like Billy:



(continued in the subsequent entry, "Belief and Perspective.")

Billy is mentioned specifically — though not by name — here:

 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Arcs,
Well, hey. . . if we can’t solve the problem then let’s at least save the euro! Personally, I see little need to prop the euro up with shrinking dollars.
Please explain. Given your highlight I assume you think I believe that the plan I endorse is not going to help. That is not the case. I just don’t believe it will solve everything, it could help a great deal. A recession is here and will deepen.

The problem is with MBSes, CDOs, and CDSes being bought, sold, and traded in manners designed to fraudulently (even if legally) pump up volumes to pad bonuses.

You’re suggesting government "ameliorate" a problem that was government-created to provide government-lootability. And that, all with taxpayer or investor money.
I don’t think you understand what was written above. We would have a claim on the assets at high interest rates. We would have no ownership. As long as the assets are there to back the claim then we face no risk. If the assets are near insufficiency we close the suckers down liquidate and are made whole.

As for your tirade, well you haven’t been reading me for long obviously, because I have been screaming about it for years. Finally people are where I am at with this and they want to either buy into a plan that is fatally flawed or just say let the whole thing burn down. Sorry, but helping fundamentally healthy institutions which our entire economy depends upon crash and burn due to the sins of congress and the stupidity and recklessness of others is just plain stupid.

Not doing anything will cost us far more in taxes than doing something, though I do agree that a poorly designed plan is worse than no plan at all. Unlike the Paulson plan, this plan will likely profit the treasury.

There is also the time value of money to consider.
All in all, I am a great believer in simplicity, and this ain’t it. I am not particularly concerned that some homeowners may take a hit. There are already procedures to renegotiate mortgages, so why complicate things?
if it doesn’t help it lies unused as an option. In fact though, under present law, workouts along these or other lines are pretty much impossible. They can reduce the mortgage, and the payments, but the lender just loses in that case. The homeowner gets a great deal if it is low enough, and gets subsequent appreciation. Needless to say this leads to far fewer workouts than if the ability to structure more sound options was available.

"but they do lose future gains,"

All of them?
In this variant they lose them up to the point the lender is made whole. Of course this is just an example, other options could be allowed and as I mentioned, I am going to discuss some other variants as well. The point of this, the Chilean example and most of the ones I am going to float is an emphasis on workouts rather than bailouts. The government can facilitate them, right now it is standing in the way.

"and their original equity"

Where did that come from?
From their down payment. This proposal is targeted at people who can afford a home, not people who never should have gotten a loan. This crisis goes far beyond subprime as I have pointed out time and time again. They lived in over priced mortgage markets and now are underwater. If it was just subprime this crisis would not be as serious as it is.
and then now calling it an "investment" because the Government has controlling stock or better terms on the assets instead of what it still is "a bailout".
Re-read my post. It is specifically rejecting government ownership. It is a loan with a senior claim on the assets. If the assets don’t exist to cover the loan then we shut them down, or they will not bother to apply. The fact is that there are plenty of assets to cover us, as the post also shows. There were in Bear Stearns case, Lehman’s and WAMU’s.
As for why I don’t like it, point #1, I think it’s disingenuous to say that the original bailout plan is just taking the bad assets off of the balance sheets and not recapitalizing. How do these assets get off the balance sheets? It doesn’t disappear in a write off. The bankers essentially get their money bank for these bad loans. How is that money not available for them to do whatever and/or leverage? How is that not recapitalizing and further that 5% disappears from the "balance sheets"?
Re-read the post, that is explained. If I buy $2 of assets for $2 then the capital position of the banks has not changed, the fact that it is cash doesn’t change that one bit.
"Price discovery" only highlights the BIG problem. Everyone knows this. All of these bailouts are trying to hide and absorb this on the backs of the taxpayers, so they have to do that in one fashion or another. Again, I feel this is a disingenuous reason. The bailouts plans aren’t going to be surprised by this gotcha, all plans are trying to insulate it.
No, again. Read the post. The bad assets stay on their balance sheet. We loan some portion of the combination of shareholder equity and debt to bondholders at a high interest rate. Just like Warren Buffett. As long as there enough to easily cover us we get the goodies if they fail, the bondholders and shareholders get whatever is left over. It is their responsibility to do something about those bad assets.

But more to the point, which way do we want our screwing? Do we want the Government to hold questionable assets long term in the hopes they go up, or do we want the Government to hold controlling stock in companies that still have bad assets
I don’t want either, and my plan specifically rejects both options. So, it bears absolutely no resemblance to Soros’ plan other than it is a plan.
I mean PAR assets? Are still the same tainted/poison assets. Why should a "home owner" be able to then have a $200k (post PAR bailout) mortgage (originally $300k pre-crisis), sell at $250k to someone (say me) in 2010 or 2015, whenever. Sure give the $50k to the Government (for their investment) and then I sell it 2025 at $350k, but I only get $50k out of it after the Government takes the rest of theirs. While it appears to be a $50k interest free discount for a few years on a home worth $300k.
Once again, re-read the post, you have misunderstood the plan. The government doesn’t get anything, or give anything. In fact, your example shows me you were so busy trying to disagree that you misunderstood the entire proposal.

How it works is the lender, rather than foreclose allows the homeowner to reduce the loan to a level that the homeowner can afford, say 200k as in your example. We don’t care what the house is worth, the homeowner just wants to be able to stay in the house and not wreck his credit rating too badly.

The Lender gets a PAR which allows upon any sale the right to get the sale price on the home up to 300k. So when you come and buy the home for 250k the lender gets the 50k. You know that you will not get the first 50k, so you probably only bought it for 250k because the house is now worth much more than that, or you wouldn’t buy it.

See, the original homeowner has a home worth (say 300k now) and got none of the appreciation even though he originally put 40k in it. He loses. The lender loses because he has foregone interest on the balance, but at least got part of the principle back, and when you sell it may get more of it. I suspect there will develop a market in PAR’s. The new buyer paid 50k less for the house (good deal for him because of the interest savings) but will not get the first 50k from the sale. Anything above that he gets to keep.

The government isn’t doing much but letting such arrangements be legal.
I’d rather pay the piper now and the people in these banks should go to jail.
No argument here, but the present managers, especially if the institutions are healthy, probably could help us all out by not failing and having our economy crash and burn. They should pay a punitive interest rate so the loan is a last resort and they have a strong incentive to pay us back fast by arranging for private financing as soon as the money markets recover.

Look, I understand balance sheets are not what most people deal with, which is why I used the simple one above. Still, this is important stuff, we cannot let our anger keep us from even understanding the proposal’s out in front of us. If you don’t understand, lets go over it. I am very patient. If you don’t like the idea, hey, show me something better. If it is just that you don’t believe things are as serious as I do, then you are entitled to your opinion.

In some ways we are being panicked unnecessarily, in other ways it is important for you to understand that financial crisis are the Achilles heel of capitalism, whether you think they are caused by government or not. The ramifications can be much more dire than you expect.

Individual institutions failing are not the disaster that Paulson and company want us to think they are.

Systemic market meltdowns where financial institutions keel over like dominoes due to excessive leverage can lead to full fledged depressions at worst and Japan like malaise for decades. These are not things to trifle with in my opinion.

The proposal above is not only as minimal as we can be and still be doing something, but they keep the risk on the shoulders of those who should bear it.
 
Written By: Lance
URL: http://asecondhandconjecture.com
"Why don’t I go buy an untainted house for $250k and get all of my inflationary protection money’s worth from the house?"

Rats. Wish I had thought of that. It is obvious now that I think about it. Houses, as we all know, are not merely shelter, they are investments, and why on earth would anyone buy an investment that doesn’t appreciate? Particularly when there is a similar (if not identical, these days) house a few blocks away for the same price without the lien.

"I suspect there will develop a market in PAR’s"

Just what we need-another GD financial product dependent on the housing market.


"In some ways we are being panicked unnecessarily"

We can agree on that!
 
Written By: timactual
URL: http://
Apparently you censor web links. A bit afraid people might actually go to my site (chuckle). You pay me an offhand compliment by such things. Here they are again, if the censors are becoming a little more tolerant of diverse views:


Not being quite so petty, I actually list Q & O on my blogroll.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Wish I had thought of that.
Except I addressed why you would do so. The price would discount for just that, hence the pain I pointed out that would be shared. That is why a market based solution works, as opposed to judicially mandated mortgage cram downs or foreclosure proceedings with legal restrictions against lenders being able to profit enough to make them whole over time.

This isn’t really that complicated, it would work just like assuming a mortgage, except here the payment is based on market appreciation rather than a definite payment.
Just what we need-another GD financial product dependent on the housing market.
Actually we need many more. The problem isn’t products, it is the incredible leverage which fueled a bubble and turned market (and policy) mistakes into disasters.
 
Written By: Lance
URL: http://www.asecondhandconjecture.com
Did you guys see the list of earmarks included in the bailout?

and a mental health provision as well??
Apparently you censor web links. A bit afraid people might actually go to my site (chuckle). You pay me an offhand compliment by such things. Here they are again, if the censors are becoming a little more tolerant of diverse views:
You think someone is censoring you?? here!?

Yeah sure "rolls eyes"
 
Written By: capt joe
URL: http://
A few points, Lance:

(1) I’m pretty sure that the TARP Bill provides for exactly the sort of senior debt instruments (among other things), and what are effectively the high interest rates that you (via John Hussman) are suggesting. Check Section 106 in particular. There are provisions empowering the Secretary to take "senior debt" positions in participating companies, as well as for converting any equities into senior debt if a company is delisted from an exchange (i.e. heading into b’ruptcy). There are also mandatory insurance "premiums" to be set and collected by the Secretary for participating companies with respect to any debts purchased, which are effectively just the Fed acting as CDS seller. The overall effect is nearly indistinguishable from what you suggest (which, I gather, is basically the government giving a heavily collateralized mortgage to distressed companies).

(2) Regarding the homeowners, I basically agree that the HOPE provisions aren’t going to do much good, but changing bankruptcy laws to allow courts to restructure mortgage contracts (which is what I’m guessing that you and Hussman are suggesting) is incredibly problematic here. It is true that the b’ruptcy courts have such powers in certain cases already, but that is only where the homeowner has declared b’ruptcy. It’s a much different case where the mortgage holder (not to mention the owner of MBSes) is in b’ruptcy, and the homeowner is really just an asset of the Debtor. In that case, the court really has no authority to rework the contract (despite how some judges and U.S. Trustees act), and especially not in favor of the homeowner. The Debtor’s assets are supposed to managed in favor of the creditors — i.e. maximized income.

(3) Speaking of "streamlined bankruptcy procedures" that is really what the bailouts (all of them thus far, including the FDIC-facilitated transactions) have amounted to. The advantages have been that the process took a couple of days or weeks in each case, where even a simple, pre-packaged b’ruptcy can take several months.

(4) As with all legislation of this sort, it’s difficult to say what TARP will accomplish until after it has passed and the Secretary can begin creating regulations. That’s where the rubber meets the road, not the statute. All TARP does really is empower the Secretary as the CEO of a giant corporation (part bank, part insurance company) with lots of money and a business plan. He’s basically being given all the tools necessary to accomplish the business plan, but he has to set about using them to form the actual tactics for getting things done. Once the regs are in place, and the programs mandated by TARP have been set up, we’ll have a better idea of how this is all going to shake out.
 
Written By: MichaelW
URL: http://qando.net
"You pay me an offhand compliment by such things. Here they are again, if the censors are becoming a little more tolerant of diverse views"


Delusional, as always, with a little paranoia creeping in.
As if that link had never been posted here before.
 
Written By: timactual
URL: http://
Do I understand this correctly?

I am a homeowner whose house has depreciated and for some reason I cannot or will not make the mortgage payments. Under this plan I am going to start over, losing my equity and also any chance of a gain when the market goes back up. In effect, I am now a renter with the added joy of paying taxes, insurance, and maintainance. No thanks, I am not that desperate to get screwed.
 
Written By: timactual
URL: http://
Well, hey. . . if we can’t solve the problem then let’s at least save the euro! Personally, I see little need to prop the euro up with shrinking dollars.
Please explain. Given your highlight I assume you think I believe that the plan I endorse is not going to help. That is not the case. I just don’t believe it will solve everything, it could help a great deal. A recession is here and will deepen.
Right. I believe the plan you espoused yesterday will do little to help and you even said so yourself. I just agreed with you.

As for the euro, European governments waited until our Congress successfully failed to pass the 1st $700B bailout/buy-in/workout/rescue plan. Yesterday’s news:
Bank rescues spread in Europe on Tuesday after U.S. lawmakers rejected a $700 billion rescue plan for the financial industry.
The euro goes down, the dollar goes up. That’s a bad thing? The Europeans waited to see how much money we’d pump in before they threw euros at their banks. Do you think the Europeans would have done as much if we had passed the
1st $700B bailout/buy-in/workout/rescue plan?
I don’t think you understand what was written above. We would have a claim on the assets at high interest rates. We would have no ownership. As long as the assets are there to back the claim then we face no risk. If the assets are near insufficiency we close the suckers down liquidate and are made whole.
I probably didn’t understand your earlier reply. I sure don’t understand your paragraph quoted above. By assets, you’re talking the MBSes and CDOs, right? So, we would have a claim on them but no ownership? And with the claim w/o ownership, there’s no risk? No risk of what, exactly? Because there would be risk of a negative ROI, as you aptly point out with the last sentence above even though you say "made whole".
Finally people are where I am at with this and they want to either buy into a plan that is fatally flawed or just say let the whole thing burn down.
If those are the choices, you can put me down for the latter. The difference is, I don’t think the whole thing will burn down. I’m not for any bailout/buy-in/workout/rescue plan that doesn’t address the root causes of the problem, regardless of what the plan is titled.
Sorry, but helping fundamentally healthy institutions which our entire economy depends upon crash and burn due to the sins of congress and the stupidity and recklessness of others is just plain stupid.
We’ll have to agree to disagree here. If the institutions are fundamentally healthy, the entire economy won’t crash and burn. And, as for the stupidity and recklessness of others, well . . . it ain’t the job of Congress to protect the stupid and reckless from themselves.
 
Written By: Arcs
URL: http://
Good site. Thanks.
[URL=http://tiffanys.schadez.info]tiffanys[/URL] tiffanys [URL=http://venus-swimwear.zeiter.info]venus swimwear[/URL] venus swimwear weightwatchers weightwatchers annualcreditreport annualcreditreport citimortgage citimortgage http://orlando-sentinal.schadez.info orlando sentinal http://gieco.zeiter.info gieco http://peapod.zeiter.info peapod http://thrifty-nickel.zeiter.info thrifty nickel http://bamboozle.zeiter.info bamboozle
 
Written By: tiffanys
URL: http://tiffanys.schadez.info
Very nice resource - thank you.
www-jang-pk blog info telivisionx-co-uk about online yonggirls about online analtube-for-you blog online video-n70-porno site about imgsrc-galleries site info petsex-world-com about blog hard-pthc-no-nude info about animal-sxe-com site fake-megan-fox-cum about about
 
Written By: analtube-for-you
URL: http://analtube-for-you.sysake.com/
Thank you for your web pages. See that you have updated it. Keep up the good work.
daniela-elger-fotos site boys-erected info xxxmovis-porno site site porno-arab-hijab site info vykedirect about about orgasme-com-porn site about www-srbija-com blog about www-usher-com info hamada-music-com about about nudebody-com site
 
Written By: boys-erected blog
URL: http://boys-erected.fojopy.com/
Your site is very interesting and useful
yuporno info blog lolli-nude about info www-bnat-agadir info info ghana-porno blog blog fustana-foto info about possy-com about blog ladyboy-mint-tube online arabic-you-tube-xxx about info moparscape-links about site hairy-vajinas about site
 
Written By: ghana-porno
URL: http://ghana-porno.pobima.com/

 
Add Your Comment
  NOTICE: While we don't wish to censor your thoughts, we do blacklist certain terms of profanity or obscenity. This is not to muzzle you, but to ensure that the blog remains work-safe for our readers. If you wish to use profanity, simply insert asterisks (*) where the vowels usually go. Your meaning will still be clear, but our readers will be able to view the blog without worrying that content monitoring will get them in trouble when reading it.
Comments for this entry are closed.
Name:
Email:
URL:
HTML Tools:
Bold Italic Blockquote Hyperlink
Comment:
   
 
Vicious Capitalism

Divider

Buy Dale's Book!
Slackernomics by Dale Franks

Divider

Divider