Discussion of proposed $700 billion - $1 trillion bailout plan

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wwswimming

Banned
Jan 21, 2006
3,702
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one chart that is important to understand what is happening with the US banks.

http://research.stlouisfed.org/fred2/series/BOGNONBR

Non-Borrowed Reserves. the banks are supposed to have reserves to cover their own debts & liabilities. they have customer deposits, which are a form of reserves - unless people panic and pull money out of their accounts.

starting in February 2008, the number went negative. meaning the only way banks en masse could meet reserve requirements was with borrowed money. at first the number was 10 billion. then 20 billion.

now, 125-130 billion. that is how much US banks are away from being solvent, as defined by the regulatory standards (ratios of reserves to loans) that constituted SOP (standard operating procedure) until earlier this year.

the slope of the non-borrowed reserves curve - 20 billion in March, call it 120 billion in September. increased 100 billion over a period of 6 months. in other words, US banks are having to borrow more and more and more to meet reserve requirements, at a rate that is quite historical.

i think the technical economic details of what is occurring is one of the most fascinating things i have ever seen.

Cliff Notes version - i think this is the biggest financial train wreck in the history of our species. for people that get caught in the collapse, e.g. losing life savings, it is and will be extraordinarily painful.

the odd thing is, this whole mortgage-backed securities industry was really a class of products that were only purchased by wealthy people & financial institutions. however, because these credit derivative products permeate our financial institutions, on which working folks & small businesses depend, the choice to let those institutions fail is hard to imagine.

if the investments that were made to wealthy people could be separated out, i would say, let them take the loss. if the fact that their investments were leveraged causes their wealth to be wiped out, i would say, so it goes, that's what happens when you invest using borrowed money. Warren Buffett would still be there with the funds to run MBIA, one of the bond re-insurers, an important but obscure part of this situation. Gates would still be there.

i wonder, as the government starts dissecting the products they just bought, e.g. the Longshore credit derivative, what will they do ? i would ask, "who bought this product, who owns it". it was sold by a hedge fund, who sold shares in the product to banks and wealthy investors. the hedge fund should have a list of customers. the Longshore CDO is worth 10 cents on the dollar. i don't know the practice, if it's a time "deposit" that is cashed out at a particular time, or if investors can choose to wait, like not selling a stock when the price has fallen.

multiply x 1000, that's the task the government has taken on. who will pay the salaries of the people who are assigned to unwind and dissect this whole mess ?

are lawyers going to make a HUUUUGE amount of money from this situation ?

 

Craig234

Lifer
May 1, 2006
38,548
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Originally posted by: Craig234
Originally posted by: Napalm
I think the bail-out is absolutely necessary. Without it, the economy could collapse in a way that would make 1929 seem like a walk in the park. If one looks back at that period, one of the major criticisms was that the government and the Federal Reserve did not act quickly or boldly enough. It appears they are not going to make the same mistake again.

The real question in all of this is what this says about Capitalism as a viable system...
My impression now is that the government recognizes that this is purely an abuse of the taxpayer that pays off the big guys who acted terribly and rewards them, but that if they don't do it the effect could be far worse. It's somethig I can't how much that's the case and how much it's a cover story to sell their protection of the big Wall Street guys, probably a lot of both.

Watch for the right-wing economic people to have the gall to argue that the cause of this was *too much* regulation, and that the fix is to cut even more regulation, after the public is distracted by other bright shiny objects enough not to pay much attention and get furious. The question whether that view turns into government policy depends who is elected, though it's possible neither of the candidates has the independance from Wall Street needed for doing the right reforms.

Sorry, but I think the govrnment would be right to say that firms are not allowed to get so big that an otherwise unjustified bailout has to be given because we can't afford not to.

I see nothing wrong with regulations forcing more companies to compete instead of allowing one to get to that point and put our economy at risk.
I'm not opposed to the government taking appropriate measures to help the corporations prosper. It's the inappropriate measures - the ones aimed at selling out the public to let the corporations get profits that are not in the public interest, which has happened a lot under Bush - that I'm opposed to.We want strong, prosperous, profitable corporations, but we want them reigned in politically, not to dominate the system and push through laws that let them do bad things for profit.
 

Napalm

Platinum Member
Oct 12, 1999
2,050
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Originally posted by: Jaskalas
Originally posted by: Napalm
The real question in all of this is what this says about Capitalism as a viable system...
The most capitalistic nation on earth also became the greatest nation on earth. You call it a coincidence?
First - define for me "most capitalistic".

Second - define for me "greatest nation".

Third - look up correlation and causation...
 

Firebot

Golden Member
Jul 10, 2005
1,476
1
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Originally posted by: Napalm
I think the bail-out is absolutely necessary. Without it, the economy could collapse in a way that would make 1929 seem like a walk in the park. If one looks back at that period, one of the major criticisms was that the government and the Federal Reserve did not act quickly or boldly enough. It appears they are not going to make the same mistake again.

The real question in all of this is what this says about Capitalism as a viable system...
Canadian banks (other then CIBC) have no problems at all, so this is not a capitalist system problem. The US simply has a corrupt covernment catering to banks that decide to take a stupid gamble and lost. Not like it matters since it's taxpayers who will be footing the bill, while the CEO's and executives get to keep all of their bonuses.
 

winnar111

Banned
Mar 10, 2008
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9 years ago:

Text

Fannie Mae Eases Credit To Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''



And Raines is linked to Obama....
 

Napalm

Platinum Member
Oct 12, 1999
2,050
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Originally posted by: winnar111
9 years ago:

Text

Fannie Mae Eases Credit To Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''



And Raines is linked to Obama....
You still trying to link this suprime mortgage mess to Obama? Have you heard of Phil Gramm? He is the sponsor of the bank deregulation bill that allowed this to happen. He also happens to be McCain's top economic adviser and chair of his campaign.

Oh and by the way - you never did answer me on how McCain voted on this bill. He voted for it - but I'm guessing you already knew that...
 

Napalm

Platinum Member
Oct 12, 1999
2,050
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Originally posted by: winnar111
Originally posted by: ironwing
Originally posted by: winnar111

And Raines is linked to Obama....
I'll bite. What's the link?
Obama has called on Raines for economic advice.
Really - provide us a link. If you do, I'll provide you with a quote from Raines saying he has never been asked for nor provided economic advisory to the Obama campaign.
 

Thump553

Lifer
Jun 2, 2000
12,216
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Let's try to stay off diversions like the supposed Raines/Obama link. There's plenty of room for that (and the far more interesting and fruitful McCain/Phil Gramm link) in other , or new, threads. This thread is about the discussion of the pros and cons the proposed bailout plan.

In another thread there was a link to the entire text of the proposed bailout law, as published in the NY Times. Here is the full text of the proposed law:


Text of Draft Proposal for Bailout Plan


Published: September 20, 2008
LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY

TO PURCHASE MORTGAGE-RELATED ASSETS

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.
Although I see the absolute need for immediate remedial action, this propsed plan is a pure bailout, nothing more. I don't see how anyone of any political bent can support such a giveaway program, standing alone. There's no reform and there's no accountability for the institutions that caused this problem.
 

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