OT - Financial mess 101 ($700 billion bailout)

[matthewk]

I think the future will be scary. We as a country are so far in over our heads in debt it's unbelieveable. I'm sure this current crisis is not the end of our troubles.

My fear is that at some point the rest of the world is going to finally decide to quit putting up with our crap and we'll sink....quickly. Right now they are highly dependant upon our economies survival. I can't help but think that a lot of the world is simply putting up with us because we devour so much of their "stuff" as consumers.

[nyisles16]

Well, down goes WaMu....

[pk500]

I think the future will be scary. We as a country are so far in over our heads in debt it's unbelieveable. I'm sure this current crisis is not the end of our troubles.

You're absolutely right. All this bailout will do is provide capital for banks to have confidence to start lending again, so people who already are cash-strapped can get even more credit to buy the sh*t they don't need.

And therein lies the Catch-22 of our economy. We love to buy our "stuff," which keeps the GDP and annual growth rate humming compared to many European nations, but when it comes time to pay for all of these goodies bought on credit, we're f*cked.

One would hope that banks are much more strict on providing lines of credit in the future. I have serious doubts.

Take care,
PK

[JackB1]

And therein lies the Catch-22 of our economy. We love to buy our "stuff," which keeps the GDP and annual growth rate humming compared to many European nations, but when it comes time to pay for all of these goodies bought on credit, we're f*cked.

Take care,
PK

It's like when Bush asked us to spend our stimulus checks and go out shopping. This vicious cycle of debt was bound to catch up with us (the country) sooner or later. Like you said, just funding the banks to go back to "business as usual" won't accomplish much. Let's hope major reform is on the way.

[matthewk]

What's scary is that I don't think it's fully caught up with us yet. This is just once piece. You still have millions of Americans with thousands in unpaid credit cards out there, and they are still spending more than they have. We also still have an enormous national debt.

Once this bailout is over, the people responsible for this mess will also be right back to what got us here in the first palce. I don't think this is really teaching anyone a lesson.

Uh oh. I think I'm agreeing with Jack on this. Damn the synthetic polymers!

[pk500]

Let's hope major reform is on the way.

I'm making a major leap of inference here, so pardon me if I'm off base, Jack. But your final line above I think illustrates a big difference between your political philosophy and mine.

The most major reform that needs to come in the wake of this crisis is in the household budgets of millions of Americans, not from government oversight of the banking industry.

It's up to individuals to stop buying themselves into a whirlpool of debt. That's not the government's responsibility or the bank's responsibility. The bank's job is to offer credit; that's how they make money when the system works.

The true onus is on the morons who put themselves into five figures of credit card debt just so they can keep up with the Joneses. The real change must start with them.

It still boggles my mind that the average household credit card debt in the U.S. is $10,000. I would get f*cking clammier than a slug on a wet driveway if I had a $100 balance on my credit card.

Take care,
PK

[wco81]

First of all, the crisis wasn't caused by consumer debt. But it's certainly a problem.

Solving that problem is not as easy as people cutting back their lifestyles.

If people did, the economy slows down because it's so heavily dependent on consumer spending.

It may not make sense to buy or lease a new car every 3-4 years but that behavior accounts for a lot of economic growth.

There's a cultural change that's required but really, it's part of the American Dream. If Americans aspired to live like monks, the country wouldn't be what it is today. Even with all this debt and deficits, it's over $10 trillion economy.

And credit card companies have fared well in this decade, getting bankruptcy legislation to make it easier for them to sink their hooks in, while otherwise being left unfettered to prey on people.

Not all credit card debt is due to buying useless stuff. With stagnant wages, people are using cards to pay for daily living expenses. They're even tapping into their 401k accounts, even with the penalties.

So the obstacles are cultural as well as legal/regulatory. Which is more likely to be overcome?

[RobVarak]

And credit card companies have fared well in this decade, getting bankruptcy legislation to make it easier for them to sink their hooks in, while otherwise being left unfettered to prey on people.

(cough) Joe Biden (cough)..

...(slinks back to political thread)

[RobVarak]

I don't know which thread to post this in LOL

Larry Kudlow on the most recent developments. Things sound promising for the first time in a while.

The single-biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction in order to unfreeze the banking system. In other words, folks don’t understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed.

Here’s the key point: Any loan package bought by the Treasury will be 100 percent taxpayer owned. Period.

Let’s walk through this hypothetical for a moment. Through a market-driven auction, the Treasury will purchase some dollar amount — say $100 billion — of loans that banks will sell. The Treasury will then buy those loans at the prices that fill the auction, starting with the lowest prices and working up. Now, the Treasury will hold those bonds either to maturity or for a sale in the open market if rising prices in the market make that sale attractive. In other words, suppose the Treasury buys a bond package at 20 cents on the dollar. They hold it for a while, and if market conditions improve, they sell it for 50 cents on the dollar to some buyer (e.g., an investment fund, a private-equity fund, a hedgie). The Treasury will make the sale at the higher price in order to gain a profit for taxpayers.

In the meantime, as the Treasury holds the loans, the government will get monthly cash-flows coming in on the mortgages, or on any other loans that it owns. So it is win-win for taxpayers. First, taxpayers get the cash flow generated by the assets. (Something like a 10 percent interest rate.) Second, if the loan is sold for profit, the taxpayers will own that profit. And the new law must of course stipulate that all the cash flows and/or profits go for debt-reduction to protect taxpayers.

I don’t think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt.

Actually, for taxpayers, it’s a win-win-win-win.

Think about this. The troubled assets purchased by the Treasury right now are likely to be very under-priced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit.

I have been in conversation with leading House Republicans all day. And they understand these key points. Unfortunately, this understanding did not materialize in their original meeting with Mr. Paulson a few days ago. But now the actual reality is sinking in.

Another point: Republican leader Eric Cantor has an excellent idea for a federal bond insurance guarantee for straight mortgage-backed paper, financed by private-sector insurance premiums. That will improve investor confidence in mortgage bonds and will make those bonds highly marketable. Importantly, senior Treasury officials have told me that Mr. Paulson will accept the insurance idea as an option in the final bill, alongside the ability of the Treasury to purchase distressed assets.

Sources also tell me that other conditions will be necessary to bring the House GOP along. First, the ACORN slush fund must be removed. Second, the so-called union proxy to run a slate of corporate directors is a big problem. Third, all profits from the Treasury rescue mission must be used to reduce the national debt — 100 percent. Fourth, Republican members are opposed to bankruptcy judges setting mortgage terms and interest rates (Sen. Obama also is opposed). Fifth, the so-called government equity ownership of banks is distasteful because it effectively creates a corporate tax increase on banks at a time when they are struggling. And last, the Treasury secretary’s request for $700 billion is regarded as way too high.

Essentially, House Republican leaders want a slimmer, cleaner Paulson plan supplemented by Mr. Cantor’s mortgage-bond insurance program. I think it’s a good package that would be great news for stock and bond markets that are now ailing badly. It would set the stage for a gradual return to normalcy on the part of bank lenders, including loans to small businesses, consumers, and homeowners. It would be a pro-growth package at a time when the economy desperately needs a prosperity tonic.

I had no idea that ACORN was involved in any way, shape or form. WTF?

[wco81]

Obama voted against.

Biden and McCain voted for.

[JackB1]

I'm making a major leap of inference here, so pardon me if I'm off base, Jack. But your final line above I think illustrates a big difference between your political philosophy and mine.

The most major reform that needs to come in the wake of this crisis is in the household budgets of millions of Americans, not from government oversight of the banking industry.

It's up to individuals to stop buying themselves into a whirlpool of debt. That's not the government's responsibility or the bank's responsibility. The bank's job is to offer credit; that's how they make money when the system works.

I agree with you in theory, but you know that sometimes too much freedom is a dangerous thing. The average American will borrow over their heads. True, it's not the Govt's responsibility, but the bank is not supposed to grant credit if the borrower doesn't look like they can repay.

It's like the bartender who serves someone who's obviously had one too many already. Both parties need to act responsibly.

[JackB1]

Once this bailout is over, the people responsible for this mess will also be right back to what got us here in the first palce. I don't think this is really teaching anyone a lesson.

Uh oh. I think I'm agreeing with Jack on this. Damn the synthetic polymer!

Mark down the date and time!

The silver lining of this mess is that, like 9/11, this thing has brought us all together a little bit. We are all in this together...regardless of party loyalties.

[RobVarak]

Obama voted against.

Biden and McCain voted for.

True, but only one had a kid working for MBNA

[RobVarak]

From WaPo.com More evidence that the GOP is getting their act together:

Cantor said that some of the "exotic sliced and diced" mortgage-backed securities at issue for the financial institutions are of such little value — because the underlying mortgages are already deep in foreclosure — that using the Republicans' preferred approach of federally insuring them is pointless. "So you've got to go with Paulson's model," Cantor said today, endorsing the federal purchase of those securities to clean up the books for financial firms in distress.

In exchange, Cantor said he is seeking some sort of assurance that that the Treasury secretary would be allowed to create an insurance program for the other mortgages, charging premiums to the firms holding securities tied to those mortgages...

[wco81]

For some unfathomable reason, that bankruptcy vote in the Senate was 74-25.

Clinton abstained because Bill was getting surgery but she had been leaning towards it.

Republicans touted it as making people take personal responsibility. Even some conservatives said it was a sellout to the credit card companies and banks.

[RobVarak]

Chuck "Mic, where's a mic?" Schumer was just on Fast Money on CNBC. Apparently the working committee have offered to incorporate the insurance plan favored by the House GOP members as an option for the Secretary of the Treasury rather than a mandatory part of the plan.

Hopefully Cantor can impress upon his colleagues that they should make this deal as long as the ACORN nonsense etc. are out.

Michael Barone published a column earlier today wherein he spoke to Cantor about this very issue:

So I asked the SHR whether a commitment by Paulson to consider an insurance program would be enough to win over a significant number of House Republicans. He said that a hazy commitment would not be enough, with the implication that the bill would still seem to House Republicans to be a Wall Street bailout with the implication that the government would be shelling out $700 billion of taxpayer money. I followed up by asking whether House Republicans would go along if Paulson pledged to use authority in the statute to set up an insurance program within a month of passage. "That would go far toward convincing [Republican] members," the SHR said. In other words, the insurance option may be the way to save this legislation.

[RobVarak]

This is totally f***in unacceptable! This is the problem with having Dodd and Franks still involved with the process.

http://volokh.com/archives/archive_2008 ... 1222499614

And it's particularly scary given the news that European super-bank Fortis may fail on Monday. We're potentially looking at a liquidity crisis that won't even be addressed by this bailout and which will require re-tooling the FDIC and other measures to prevent cascading bank failures.

[Jackdog]

I got a kick out of this.

You know, after reading this, you have to ask yourself why not!

Now here's a bail out plan that works!

I'm against the $85,000,000,000 bailout of AIG.

Instead, I'm in favor of giving $85,000,000,000 to America in "We Deserve It
Dividend".

To make the math simple, let's assume there are 200,000,000
bonafide U.S. Citizens 18+.

Our population is about 301,000,000 counting every man, woman
and child. So 200,000,000 might b e a fair stab at adults 18 and up..

So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

My plan is to give $425,000 to every person 18+ as a
"We Deserve It Dividend".

Of course, it would NOT be tax free.

So let's assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes.

That sends $25,500,000,000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife has $595,000.00.

What would you do with $297,500.00 to $595,000.00 in your family?

Pay off your mortgage - housing crisis solved.

Repay college loans - what a great boost to new grads

Put away money for college - it'll be there

Save in a bank - create money to loan to entrepreneurs.

Buy a new car - create jobs

Invest in the market - capital drives growth

Pay for your parent's medical insurance - health care improves

Remember this is for every adult U S Citizen 18+ including the folks
who lost their jobs at Lehman Brothers and every other company
that is cutting back. And of course, for those serving in our Armed Forces.

If we're going to re-distribute wealth let's really do it...instead of
trickling out
a puny $1000.00 ( "vote buy" ) economic incentive that is being proposed
by one of our candidates for President.

If we're going to do an $85 billion bailout, let's bail out every adult U S
Citizen 18+!

As for AIG - liquidate it.

Sell off its parts.

Let American General go back to being American General.

Sell off the real estate.

Let the private sector bargain hunters cut it up and clean it up.

Here's my rationale. We deserve it and AIG doesn't.

Sure it's a crazy idea that can "never work."

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85 Billion
"We Deserve It Dividend" more than I do the geniuses at AIG or in
Washington DC.

And remember, this plan only really costs $59.5 Billion because
$25.5 Billion is returned instantly in taxes to Uncle Sam.

Ahhh...I feel so much better getting that off my chest.

You don't want to even hear what I think about the stupid mortgage companies
that loaned out billions of dollars to people who they knew had no way of
paying
back the loans, with both sides of the equation interested in one
thing...fast money.
But it didn't work, and now we're supposed to bail out those idiots too???

[matthewk]

The system has failed. Both our elected officials and the media are failing us completely right before our eyes.

This is the prefect time for our politicians to get back to doing what they are supposed to be doing, working for the country and it's people. Instead, it's turning out to be the same old game of manuvering and deception. It's become beyond disgusting, and we're all going to suffer because of it.

Of course all our media is focused on is SNL segments making fun of Palin (when they are not doing it themselves) and bringing out an endless stream of talking head "experts" all with their own agendas. Nowhere yesterday did I hear any details of the bailout agreement being worked on. They are all too busy analysing the meaning of why each candidate chose to blink their eyes when they did instead of doing any real journalism. No one outside of bloggers and a very few in the media is giving us any real useful information.

It's a said statement when the best place for informative news on the US comes from the BBC.

Sorry for the rant. It's just so incredibly frustrating to be watching this all unfold the way it is.

[matthewk]

So JD, when do we get our checks?

[Jackdog]

The system has failed. Both our elected officials and the media are failing us completely right before our eyes.

This is the prefect time for our politicians to get back to doing what they are supposed to be doing, working for the country and it's people. Instead, it's turning out to be the same old game of manuvering and deception. It's become beyond disgusting, and we're all going to suffer because of it.

Of course all our media is focused on is SNL segments making fun of Palin (when they are not doing it themselves) and bringing out an endless stream of talking head "experts" all with their own agendas. Nowhere yesterday did I hear any details of the bailout agreement being worked on. They are all too busy analysing the meaning of why each candidate chose to blink their eyes when they did instead of doing any real journalism. No one outside of bloggers and a very few in the media is giving us any real useful information.

It's a said statement when the best place for informative news on the US comes from the BBC.

Sorry for the rant. It's just so incredibly frustrating to be watching this all unfold the way it is.

I feel your pain. It really pisses me off as well.

PS. If it were up to me,the checks would have been mailed weeks ago.

[Leebo33]

You know, after reading this, you have to ask yourself why not!

Now here's a bail out plan that works!

I'm against the $85,000,000,000 bailout of AIG.

Instead, I'm in favor of giving $85,000,000,000 to America in "We Deserve It
Dividend".

To make the math simple, let's assume there are 200,000,000
bonafide U.S. Citizens 18+.

Our population is about 301,000,000 counting every man, woman
and child. So 200,000,000 might b e a fair stab at adults 18 and up..

So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

This math works great if there were 200k adults in the U.S....with 200M...not so good. I don't think $425 would do much.

[Jared]

Our population is about 301,000,000 counting every man, woman and child. So 200,000,000 might b e a fair stab at adults 18 and up..

So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

I'm happy the writer of this isn't doing the bailout...that equals $425 a person, not $425k a person.

EDIT: Oops, see Leebo already pointed this out.

[Jackdog]

Our population is about 301,000,000 counting every man, woman and child. So 200,000,000 might b e a fair stab at adults 18 and up..

So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

I'm happy the writer of this isn't doing the bailout...that equals $425 a person, not $425k a person.

EDIT: Oops, see Leebo already pointed this out.

Good catch. I told you guys I got a kick out of it.

[RobVarak]

Looks like the bailout vote may be close.

I sent a letter to my Congresswoman for the first time in about a decade, and I joined in a letter from attorneys in my districct both advocating that she vote for the bailout.

She's voting "no."

I just can't catch a break in politics this year