Paulson and The Fed Are Not Trying To Solve The Financial Crisis. They're Trying to Delay It

[Yavin4]

Which is far worse. Look, it's kind of simple if you think about it. Several investment banks have bad assets on their books, and these assets will take them down. There are three options to correct this mess:

1. Paulson and the Fed can save them with trillions of dollars of taxpayer bailouts, which will be a major campaign issue and scandal.

2. These financial firms can find a White Knight somewhere to save them, such as a sovreign wealth fund or Warren Buffet, but there aint no Prince Charming.

3. These firms can go under, and take down the entire economy with them.

Paulson and the Fed are using option 4, delay the mess for as long as possible so as to not affect the presidential election. So, they bailout Bear, but not Lehman. They float rumors about bailing out AIG. They give under-the-table guarantees to BofA to buy Merrill and Countrywide, even though those purchases make no sense whatsoever without govt bailouts.

All Paulson and the Fed are doing is trying to run out the clock and keep the pundit talking about Moose lady and not the stock market.

[fascisthunter]

1. YYYYYUP... and Average Tax Paying Americans are Forced to Pay

a heavier price because of it... all for POLITICS and Republican economic interests.

[gratuitous]

2. Lots of things to run the clock on

I think you're right. And the question of the day is, if saving AIG with a massive cash infusion is such a good idea, why doesn't the invisible hand of the free market produce an economic actor to execute it? Why is it being left to government to act on AIG's behalf? Unless, of course, it's not really a very good idea after all. But that can't be right, can it?

[bemildred]

3. Yep, the Mugabe school of finance. nt

[Phoebe Loosinhouse]

4. The Kos diary I posted in this thread supports your assertion.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4013131

[orwell]

5. I suspect....

...Paulson knows he is in a no-win situation. Whatever he does there will be pain. They are hoping that time will lessen the toxic effects of the untold Trillions of dollars in derivative paper floating around in the global financial system. It really is a massive house of cards. We didn't get here overnight. At the very least the lunacy started with Reagan's "trickle down".

Most of the current crisis can be laid at the feet of Phil Gramm and Alan Greenspan. Paulson is trying to clean up after the elephant parade.

I actually feel sorry for the guy. I wouldn't want the job.

[WeDidIt]

6. Didn't AIG Juice it's books a few years back?

And if so, why the fuck should the taxpayers bail them out now?

[travelingtypist]

7. Thom Hartmann has been saying this for months.

That the Bushies are just keeping their fingers in the dike until they hand things over to us, and then when things go boom for real, they can point to us and say see, it's our fault.

[burythehatchet]

8. They did the same thing in 1932

The Republican Hoover administration had lost the November 1932 election to Franklin Delano Roosevelt, but his administration did not take office until March 1933. The lame duck Hoover Administration and the incoming Roosevelt Administration could not, or would not, coordinate actions to stop the run on banks affiliated with the Henry Ford family that began in Detroit Michigan in January 1933. The Federal Reserve under its chairman Eugene Meyer, who would buy the Washington Post out of bankruptcy in May 1933 as he left his post as Chairman of the Federal Reserve, was equally ineffectual.

[dbt]

9. This may be the first actual fuckup for bu$hco.

My theory has long been that what appear to be blunders, missteps, mistakes and/or incompetence by the Regime have all been deliberate moves, designed to get more wealth/power into fewer hands. A couple of large examples of this supposed bungling would be 9/11 and the War For Profit On Iraq; I'm sure you can think of others.

If bu$hco's luck had held, the mess that's boiling over now would have begun not long after Barack Obama took the oath of office. He might have gotten his "hundred days," but the shit would have wasted no time in hitting the fan. At that point, the Media Borg would've chimed in and we'd have heard chapter and verse of how "Democrat policies wrecked the economy."

IMO, things are all proceeding according to plan. They just began about a year too early.

[central scrutinizer]

10. And they are now using depositors' money as a bandaid

This is fucking illegal and they need to be called on it.

[unblock]

11. on what basis are you saying bofa's acquisitions make no sense?

both countrywide and especially merrill have assets that are certain to make money in the long run. these assets have price risk in the short run -- they can't unload them anytime soon at anything like a reasonable price -- so companies that don't have the deep pockets can't rely on them.

this is what did in bear and lehman, they were reliant on short term financing (the repo market) to support their long-term assets. yes, those assets went down in value, but the real problem was that the price cratered, way beyond the actual value. they had to mark-to-market and that killed them because nobody wanted to refi at those prices.

but for anyone who can stomach the momentary price -- caused by the complete lack of a viable market for these types of securities -- the underlying assets have real value and will produce real money over time.

bofa and jpmorganchase are among the few in a position to see these assets through to the long run, so these acquisitions make a lot of sense for them. the bear deal needed fed support not because the assets wouldn't produce value in the long run, but because jpmorganchase didn't have the time to do proper due diligence, as a result of the urgency. the fed support was the solution to this uncertainty.


to your main point, i don't disagree that the bias should be in favor of letting institutions fail when they should fail and let chips fall where they may. however, i don't government indifference toward unemployed workers, and i don't support government indifference toward failing businesses. so far i think the fed has done a fair job under extraordinary and trying circumstances.

part of the market is based on trust and faith, and rapid collapse of major institutions and markets can cause that trust and faith to evaporate, leading to further failures that would NOT have otherwise occurred. the government is in a position to reduce that risk, and should do so. MY main beef is that the institutions that benefit from this should PAY for it when times are good. my idea solution is a required "too big to fail" insurance premium (tax) for any institution that would benefit from such a bailout.

[Yavin4]

13. My Response to You

"both countrywide and especially merrill have assets that are certain to make money in the long run."

But they also have severe toxic assets that will lose money for them and open them up to massive liabilities. Buying Countrywide is like buying property with toxic waste dumped on it.

"but for anyone who can stomach the momentary price -- caused by the complete lack of a viable market for these types of securities -- the underlying assets have real value and will produce real money over time."

Uh, no, these underlying assets DO NOT have any real value. These underlying assets are either subprime mortgages or connected to subprime mortgages. These are the houses that are being foreclosed on, and no one is buying them.


"bofa and jpmorganchase are among the few in a position to see these assets through to the long run, so these acquisitions make a lot of sense for them. the bear deal needed fed support not because the assets wouldn't produce value in the long run, but because jpmorganchase didn't have the time to do proper due diligence, as a result of the urgency. the fed support was the solution to this uncertainty."

jpmorganchase did the Bear deal because they got to park the $29 billion of shit onto the Fed. jpmorganchase got a $29 billion loan at 2.5% interest and they used these shitty mortgage backed securites as collateral. That's like me getting a loan from a bank using my diry underwear as collateral.

"to your main point, i don't disagree that the bias should be in favor of letting institutions fail when they should fail and let chips fall where they may. however, i don't government indifference toward unemployed workers, and i don't support government indifference toward failing businesses. so far i think the fed has done a fair job under extraordinary and trying circumstances."

Okay, when we call for National Healthcare, we're called Socialists. When the financial firms need bailouts, it's called good for the American worker? Look at the Wall Street headlines from Jan. 2007. What are they talking about? Record bonuses for Wall Streeters. Compare that to the headlines of today.

Here's what should have happened. Paulson, the fed, et al., should have pulled these firms in a room, made them totally disclose all of their positions, and then either made them merge, find a buyer, or fail. No government bailouts. The government should have been used to assist the homeowners and the public, not the financial firms. Sure, the markets would have taken a mighty hit, but guess what, even with all of these bailouts, the markets will still take a mighty hit.

[unblock]

15. ...

>But they also have severe toxic assets that will lose money for them and open them up to massive liabilities. Buying Countrywide is like buying property with toxic waste dumped on it.

true, but for a cheap enough price, it's worth it. these failed companies are practically free.

>Uh, no, these underlying assets DO NOT have any real value. These underlying assets are either subprime mortgages or connected to subprime mortgages. These are the houses that are being foreclosed on, and no one is buying them.

mortgages are certainly worth something. not all will be foreclosed on and even foreclosed houses have significant recoveries. i'm taking a stab, but i'd guess that most subprime mortgage pools are worth 70 cents on the dollar. the problem is that right now, these deals are so toxic, you can't find a buyer for even 30 cents on the dollar. but if you can wait it out, the mortgages and houses themselves will produce something like 70 cents on the dollar.

>jpmorganchase did the Bear deal because they got to park the $29 billion of shit onto the Fed. jpmorganchase got a $29 billion loan at 2.5% interest and they used these shitty mortgage backed securites as collateral. That's like me getting a loan from a bank using my diry underwear as collateral.

agreed. jpmorganchase got a steal; the deal was done in a panicky fashion and they got a bonanza. they risk the first billion and anything beyond the first 30, and in exchange they get all the upside. not a bad gamble at all, especially given my comments above. as was often noted at the time, bear's office building is worth more than a billion. i'm at a loss to suggest something better, though. maybe the lehman model will play out better, that remains to be seen. maybe the fed is getting better at this.

>Okay, when we call for National Healthcare, we're called Socialists. When the financial firms need bailouts, it's called good for the American worker? Look at the Wall Street headlines from Jan. 2007. What are they talking about? Record bonuses for Wall Streeters. Compare that to the headlines of today.

i agree it's ridiculous. i'd love to see republicans shut the fuck up about socialism when they feed at the public trough in numbers that "welfare queens" couldn't begin to fathom. i'd also love to see an onion parody -- "feds bail out area family on verge of bankruptcy". generally, i'm in favor of judicious intervention in the economy -- labor market included. if companies deserve help in distress, certainly workers do as well. not to mention those who can't even work.

>Here's what should have happened. Paulson, the fed, et al., should have pulled these firms in a room, made them totally disclose all of their positions, and then either made them merge, find a buyer, or fail. No government bailouts. The government should have been used to assist the homeowners and the public, not the financial firms. Sure, the markets would have taken a mighty hit, but guess what, even with all of these bailouts, the markets will still take a mighty hit.

great idea in theory, but the problem is that these instruments are complex, and a single deal can take months of analysis and programming to evaluate. i know because that's my job. it's easy to list them out, but not so easy to know what they're worth. especially because all the models about their worth had assumptions that have flown out the window in this environment.

[Supersedeas]

12. the Coward of Crawford has a legacy to uphold--hand the mess to the next guy

Is that the neo-version of integrity?

[kurt_cagle]

14. If this gets widely known ...

isn't it going to cause a run on the banks?

This seems like idiocy. People have for the most part been fairly disconnected from what's going on with wall street, but the idea that they're checking and savings accounts may be plundered will likely have people taking to the streets in protest like absolutely nothing else.