The Bailout: Isn't There a Better Way?

Here is what I don't understand about the bailout. Why is it necessary for the American taxpayer to foot the bill for this? How on earth does it make any sense to "solve" a problem by giving MORE power to the self-interested boneheads that created the problem in the first place? What I haven't heard anyone talking about yet is what happens when this $800 billion or so is wiped out. How is it that our economy is $800 billion short of success? Is it just me, or does the logic that this infusion of taxpayer dollars will suddenly make disasters alright seem far fetched? Why do I feel like our government wants me to be scared and willing to accept any level of their feckless tinkering with our economy? Why do I feel like our government is "day-trading our economy" as a friend so succinctly put it? I wish I had the answers to these questions, but I don't. What I do know is that our economy needs a dose of common sense and capitalistic non-intervention to help us help ourselves. Here are a few ideas that might help us get the rest of the world to become buyers of America:

1. Reduce corporate income taxes: Our corporate income taxes are among the highest in the world. Return the incentive for profit and you have done much to bring the world's capital back to the USA.

2. Repeal Sarbannes-Oxley: I thought this post-Enron legislation was supposed to protect us from this kind of mismanagement. Let's get rid of this useless millstone around corporate America's neck.

3. Suspend Mark-to-Market regulations: Mark-to-Market is an accounting methodology that is meant to improve the accuracy of the measurement of assets. In a market that is correcting this can have an exacerbating effect on downward moves. Suspending this temporarily will halt many forced liquidations that are creating sell pressure on our markets.

4. Keep Wall Street at a 12-1 leverage ratio: This means that Wall Street firms should be limited to a market presence of no more than 12 times what their actual asset value is. 30 or 40-1 as has been OKed by the SEC for the big houses is dangerous. At 40-1 when a position is down 2.5% I am out of money. That is asking for a crisis.

5. Put Barney Frank, Chris Dodd, Franklin Raines, and Jim Johnson in handcuffs. They are criminals.

6. Eliminate or Sharply Reduce the Capital Gains Tax: A ZERO PERCENT capital gains tax will bring a flood of money into our markets. Let's showcase American ingenuity and productivity. Let's encourage the world to invest in America.

What we need is for the government of our great nation to get out of the way and unleash the power of American creativity and brilliance. Perhaps one day our politicians will realize that our solutions aren't in Washington, but at the dinner table at home. Our way out of this crisis lies in the men and women that start businesses and create products, the inventors and the dreamers. Washington, please don't kill our dreams.

There is no method of restoring confidence to US markets within this so-called plan. There really is no plan, Paulsen just wants $700 bil (and let’s not forget about the $300 bil that already has been blown) thrown into a black box he controls and once again, we will get the absolutely predictable and unendingly repetitive consequences of government meddling: Insiders use their access to raid the corpse as far as assets and to reward themselves via contacts. They then use administrative funds to try to sway (via lobbyists) the inevitable reactionary legislation by our on-the-ball Congress who are smart enough to pass restrictions after the fact; but weren’t smart enough to see any this crap coming despite warnings for years. THIS is over their pay grade. That much is clear. And it’s over Paulsen’s pay grade as well. Paulsen is a proven liar. Period. And he didn’t see this coming, so he’s no genius, either. And four months from now, he will return to Wall St, in the employ or as CEO of some firm that will reap a bombastic windfall from the disposition of these assets. And we will be standing around, shaking our heads, wondering what the hell happened, and asking how the same bastards who created the condition somehow find themselves atop the heap that controls its replacement. I mean, come on, how much of this crap are we supposed to take? How many times do we get to watch the same “I Love Lucy” episode?

We are experiencing a serious crisis; let there be no misunderstanding about that. Observing the bond market, we are seeing early omens of capital flight from US markets. You can be a bull or a bear, but unless you are allied with Al Queda, you cannot be eager to see that occur.

The reason this is happening is because the world regards the US as no better than any other market. And they have been given ample reason. To restore confidence and give the world a reason to invest in the US (instead of maybe Bulgaria) there must be a clarification of the unknowns. It’s bad enough that it appears there will be no penalty associated with the obvious fraud in mortgage repackaging method or via accounting or via fictional ratings agency backscratching the businesses they were courting by falsifying their offerings. US financial credibility and transparency has taken a giant, giant hit here. Perhaps permanent. And so far, Paulson’s answer is essentially “more of the same”. Keep the purveyors in power, in position. Speak of no reform nor consequence for law violations. And then RATIFY that inattention to law enforcement and buddy-buddy deals with the biggest blank check ever written. This is supposed to do...what?

Lacking those reforms, no amount of money will restore confidence. Ratifying the current regime by tossing astronomically more money at it only shows we have no intention of systemic reform. And without that, this is throwing money into a tornado and hoping it lands where the jerks who couldn’t be bothered to put the brakes on before we drove off the cliff say it’s supposed to.

We’re suppposed to trust Paulson. He lied a dozen times going into this, and I’ll list the dates and quotes for anyone interested. Or you can go to FedUpUSA.com and view some videos about a solid alternative proposal to the Hanktator’s bank raid that WILL restore confidence because the steps are designed to do so from the beginning, not as an accidental by-product that maybe, ought to happen. Hank never saw this thing coming. TO me, that simply and immediately disqualifies him as the surgeon who’s supposed to be trusted to operate us out of it. This is supposed to be a genius? He is using this crisis to seize power in an extra-Constitutional coup d’etat. I’m tired of trying to be polite in my references to him. He is an enemy of the state as far as I am concerned, and his actions, coming into Congress and threatening them with the “end of the world” are indistinguishable from a terrorist move. His loyalty has to be assumed as belonging to his cadre of Wall St insiders and is NOT proven nor should it be assumed to be to the US as a Constitutional republic.

Defeat this.

I think your close on the point but a little off. If this give away — lets be honest that's what it is — goes through, God forbid it does, it simply reinforces bad behavior. I don't give a crap how many laws congress change, pass, rewrite, or create politicians will never ever be as smart as professional gamblers (after all that's what stock brokers/speculators are). The point, they'll invent something more risky, and for a moment more lucrative, than short selling and CDS’s and such. If however we let things proceed lazzie-fare and some more companies collapse and the speculators loose their ass maybe they'll learn something and act a little more responsible. That's to mention nothing about the bone headed home owners and speculators that signed adjustable rate mortgages.
This who episode is a result of the lack of personal responsibility that has oozed into American society the “Why worry about risk, if it goes bad someone else will fix it” mentality.
I short, the country need to suffer through this. Without a doubt some innocent people will get hurt, maybe even me. America would be much much stronger if their is no bailout.

Put this in your teapot and steep it: As I have said, capital flight.

China banks told to halt lending to US banks - South China Morning Post

BEIJING, Sept 25 (Reuters)[ - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.

The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.

“The decree appears to be Beijing’s first attempt to erect defences against the deepening U.S. financial meltdown after the mainland’s major lenders reported billions of U.S. dollars in exposure to the credit crisis,” the SCMP said.

A spokesman for the CBRC had no immediate comment.

Excerpt: Sean Olender Sunday, December 9, 2007 San Francisco Chronicle [note the date] [Olender is an attorney; not a SF Chron writer]

THIS is what is not understood, nor talked about:

...

The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.

The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.

Perhaps some U.S. government department can make veiled threats to foreign countries to suggest they will suffer unpleasant consequences if their largest holders (central banks and investment funds) don't go along with the plan, but how could it be possible to strong-arm everyone?

What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic - not five years from now.

Those selling the "freeze" have suggested that mortgage-backed securities investors will benefit because they lose more with rising foreclosures. But with fast-depreciating collateral, the last thing investors in mortgage bonds ought to do is put off foreclosures. Rate freezes are at best a tool for delaying the inevitable foreclosures when even the most optimistic forecasters expect home prices to fall. In October, Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years. To minimize losses, a mortgage bondholder would obviously be better off foreclosing on a home before prices plunge.

The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the "real" wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"

The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.

The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray? [THIS is the absolutely critical point in terms of legal principle: Once a "victim" cooperates in any kind of "reformulation" of his/her debt, whether lender or borrower, it DISSOLVES any fraud committed on the origination of the fraud. Because it de facto ratifies, in writing, an acceptance of the reformulation.]

Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time. As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.

Paulson became the U.S. Treasury secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.

Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. [NOTE THE DATE OF THE ARTICLE: Dec 2007] The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.

If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?

Once a "victim" cooperates in any kind of "reformulation" of his/her debt, whether lender or borrower, it DISSOLVES any fraud committed on the origination of the fraud. Because it de facto ratifies, in writing, an acceptance of the reformulation.

Eeek. Yet another reason to oppose the bailout.

BTW, am I the only person who thinks that a semi-controlled crash would in fact solve the liquidity crisis in fairly short order? It seems to me it would solve two major issues:

Nobody knows what anything is worth. Adjusting down asset values on paper would reduce a lot of market uncertainty.
Nobody wants to lend money to a company which is already massively in debt to other creditors. Writing down the bad debt would assure new creditors that they wouldn't have to fight with old creditors to get their money back.

IMHO, the fact that the house of CarDS is standing is the problem. Bringing it down will be ugly, but since it's going to crash anyway, better a controlled demolition than an uncontrolled collapse.

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