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Roger Kaputnik
post Sep 25 2008, 11:51 AM
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Why Congress Objects To The Bailout Plan
by Maria Godoy


In Depth
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Chip SomodevillaSenate Banking Committee Chairman Christopher Dodd (D-CT, left) and ranking Republican Sen. Richard Shelby (AL) were among the many lawmakers who raised objections to the bailout plan during testimony Tuesday from Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. Getty Images

NPR.org, September 23, 2008 · The outrage was palpable Tuesday as the Senate Banking Committee grilled Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke on the details of their $700 billion plan to bail out Wall Street with taxpayer funds. But lawmakers are hardly the only ones questioning whether the plan will work. Here's a look at some of the objections being raised on and off Capitol Hill.

It's A Huge Amount Of Power To Invest In The Treasury: The Bush administration's plan would grant the Treasury secretary nearly absolute control of the $700 billion authorized by the bailout measure. The language in the measure sent to Congress would make the Treasury secretary's decisions "non-reviewable" — including by "any court of law or any administrative agency." That would give the Treasury secretary powers that are not only extraordinary but, some would say, also unconstitutional because of the lack of accountability.

Jon Macey, a professor and deputy dean of Yale Law School, says the bill contains the largest transfer of power from Congress to the administration that he has ever seen. Macey says Congress is handing over more power than it did in granting the executive branch leeway in the Patriot Act, and more powers than when authorizing combat through the war powers clause. He says the move amounts to a sidelining of Congress.

Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, on Tuesday called the language in the plan "so troubling" and said it "cannot last" as part of the legislation.

It Represents A Fundamental Shift In The Way The U.S. Economy Works: The Bush administration's plan to bail out the nation's financial institutions represents an unprecedented intervention in free markets. If the Wall Street bailout is adopted, Republican Sen. Jim Bunning of Kentucky said last week, "the free market for all intents and purposes is dead in America."

A fundamental principle of free-market capitalism is that investors take on big risks to reap big rewards — but they also assume any losses that occur. The government's plan would radically alter that model, leaving profits private while making losses public.

It's Not The Only Viable Option For Fixing This Mess: In a nutshell, the Bush administration's plan would authorize up to $700 billion to let Treasury buy up bad mortgages from financial institutions. With these toxic assets off the books for firms, lenders would once again be willing to lend and the money would start flowing freely through the markets, the theory goes. Objections to the plan have come from both sides of the aisle — and from academics and economists who say it amounts to a huge handout to Wall Street without necessarily fixing the problem.

Many economists have proposed alternatives and alterations to the administration's proposal, some of which have been taken up by lawmakers. Details of the plan are still being negotiated, but here are some of the key points of contention:

Equity stakes: Rather than simply buying up bad loans and letting taxpayers assume all the risk, why not take shares in the financial firms in exchange, so that taxpayers could also participate in any potential profits? Banking Committee Chairman Dodd has proposed "contingency shares" that would only be issued if losses are realized on the assets bought up from a firm. In Tuesday's hearing, Paulson rejected the idea of equity shares, saying it would make the bailout program "ineffective" — though he didn't offer details on why that would be the case.

Valuing assets: There are already buyers for these toxic assets out there — they just aren't willing to buy them at prices that financial institutions find palatable. (In some cases, selling at those prices would make firms insolvent.) Many critics argue that the fundamental problem is that the financial markets lack capital, so the only way the government's plan will work is if the Treasury overpays for the assets; otherwise, why not just let investors buy them up?

So, how to price these assets? Technically, assets are only worth what a buyer is willing to pay for them. If no one wants to buy mortgage-backed securities, then right now they are worthless — but that doesn't mean they will always be worthless. Paulson has suggested that one way to set prices would be through what's known as a reverse auction, the goal of which is to drive prices down, rather than up.

But some economists note that reverse auctions work best when the assets being auctioned off are essentially identical. That's not the case with mortgage-backed securities: Some of them may have plenty of healthy, payment-producing mortgages in them, while others may be full of defaulted loans. If the government simply buys the securities with the lowest price, it may end up with $700 billion worth of the worst loans, critics say.

Executive-pay limits: Some lawmakers want any company that participates in the bailout to agree to slash the pay of its executives. After all, they say, those who created the mortgage mess shouldn't be allowed to profit from the bailout. But Paulson has resisted this idea. He argues that pay cuts would discourage firms from using the program and would force thousands of firms to review their executive compensation before participating, a time-consuming process.

Lawmakers Are Being Urged To Act While Staring At The Barrel Of A Gun: Congress is being asked to enact a fundamental restructuring of the U.S. economy — in one week. That's not a lot of time for lawmakers to weigh their options and the repercussions of their actions. In private meetings on the Hill, Paulson and Bernanke have warned lawmakers about the dire consequences of not acting — but these economic Doomsday scenarios have not been spelled out to the public.

Democratic Sen. Jon Tester of Montana told Paulson as much on Tuesday: "I fully feel the urgency … But the truth is that we have to be given the time to do this right, or it's not going to work and we'll be back here next year or in two years asking for another $700 billion or more."

With additional reporting by Laura Conaway and Adam Davidson.



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Roger Kaputnik
post Sep 25 2008, 12:03 PM
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Personally, I have called our rep and senators to urge them to vote No on any bailout. Those guys ran their companies into the ground, and there are plenty of other banks that can step in to do what they do. Call Congress!


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Dave
post Sep 25 2008, 01:03 PM
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Not being well schooled in economics, I have to say I don't know what exactly to think on this matter.

There are those who say that doing nothing would result in the biggest crash since 1929, and the aftermath is going to look like a Mad Max movie. On the other hand, others see this as corporate welfare, and a major handout to a bunch of mega-corporations.

What concerns me is -- would this actually work? $2500 from every man, woman, and child in the country, and the economy still craters? Then, why bother? Or are they going to be coming back in six months asking for another $1 trillion to finish the job? I've read online a quote from an unnamed source at Treasury that they basically pulled the $700 billion number out of a hat -- "we just picked a very large number."

And after the Patriot Act, Katrina, the AUMF (Iraq war), etc., etc., etc., this administration can actually step up and say "give us a trillion bucks to spend any way we want with no oversight"? You have got to be freaking kidding me!
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Roger Kaputnik
post Sep 25 2008, 01:44 PM
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Lawmakers reach compromise deal on $700B bailout
By JULIE HIRSCHFELD DAVIS, Associated Press Writers 6 minutes ago

Warned of a possible financial panic, key Republicans and Democrats reported agreement in principle Thursday on a $700 billion bailout of the financial industry and said they would present it to the Bush administration in hopes of a vote within days.

Emerging from a two-hour negotiating session, Sen. Chris Dodd, D-Conn., the Banking Committee chairman said, "We are very confident that we can act expeditiously."

"I now expect that we will indeed have a plan that can pass the House, pass the Senate (and) be signed by the president," said Sen. Bob Bennett, R-Utah.

The bipartisan consensus on the general direction of the legislation was reported just hours before President Bush was to host presidential contenders Barack Obama and John McCain and congressional leaders at the White House for discussions on how to clear obstacles to the unpopular rescue plan.

Tony Fratto, the White House deputy press secretary said the announcement was "a good sign that progress is being made."

"We'll want to hear from (Treasury) Secretary (Henry) Paulson, and take a look at the details. We look forward to a good discussion at the meeting this afternoon," he said.

On Wall Street, financial markets grew more upbeat as the Dow Jones industrial average at times rose more than 300 points.

Key lawmakers in Washington said at midday that few difficulties actually remained, although no details of their accord were immediately available.

"There really isn't much of a deadlock to break," said Rep. Barney Frank, D-Mass, chairman of the House Financial Services Committee.

But there were fresh signs of trouble in the House Republican Caucus. A group of GOP lawmakers circulated an alternative designed to attract private capital back into the credit markets with less government intrusion.

Under the proposal, the government would provide insurance to companies that agree to buy frozen assets, rather than purchase them directly as envisioned under the administration's plan. The firms would have to pay insurance premiums to the Treasury Department for the coverage.

"The taxpayers haven't done anything wrong," said Rep Eric Cantor, R-Va., adding that rather than require them to bear the cost of the bailout, the alternative "pretty much puts the burden on Wall Street over time."

Rep. John A. Boehner, R-Ohio, the minority leader, was huddling with McCain on the rescue. Earlier, asked whether the GOP presidential nominee could corral restive Republicans to support the plan, Boehner said, "Who knows?"

And Rep. Spencer Bachus of Alabama, the only House Republican in the bargaining meeting, did not directly say he agreed with the other lawmakers who emerged describing an imminent deal.

"There was progress today," said Bachus, the senior Republican on the Financial Services panel.

Bush told the nation in a televised address Wednesday night that passage of the package his administration has proposed is urgently needed to calm the markets and restore confidence in the reeling financial system. His top spokeswoman, Dana Perino, had told reporters earlier Thursday that "significant progress" was being made.

House Speaker Nancy Pelosi, D-Calif., said Bush's agreement with Democrats on limiting pay for executives of bailed out financial institutions and giving taxpayers an equity stake in the companies cleared a significant hurdle.

The core of the plan envisions the government buying up sour assets of shaky financial firms in a bid to keep them from going under and to stave off a potentially severe recession.

It was not yet clear how lawmakers had resolved lingering differences over how to phase in the eye-popping cost — a measure demanded by Democrats and some Republicans who want stronger congressional control over the bailout — without spooking markets. A plan to let the government take an ownership stake in troubled companies as part of the rescue, rather than just buying bad debt, also was a topic of intense negotiation.

Bush acknowledged Wednesday night that the bailout would be a "tough vote" for lawmakers. But he said failing to approve it would risk dire consequences for the economy and most Americans.

"Without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold," Bush said as he worked to resurrect the unpopular bailout package. "Our entire economy is in danger."

Obama and McCain called for a bipartisan effort to deal with the crisis, little more than five weeks before national elections in which the economy has emerged as the dominant theme.

Presidential politics intruded, nonetheless, when McCain on Wednesday asked Obama to agree to delay their first debate, scheduled for Friday, to deal with the meltdown. Obama said the debate should go ahead.



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Roger Kaputnik
post Sep 25 2008, 01:45 PM
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WHAT A RIP OFF!!!

The taxpayers are getting screwed royally, and there seems to be NOTHING that can be done about it.


CALL CONGRESS!!!


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Dave
post Sep 25 2008, 01:55 PM
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I wonder if this could be a way for McCain to win the election?

"Maverick" could denounce the bailout, say the taxpayers shouldn't have to bail out Wall Street, that corporate welfare is bad, that capitialism requires the possiblity of failure, and that we shouldn't socialize corporate losses. On some level that would appeal to a lot of populist and free market types. On the other hand, he'd be flying by the seat of his pants, against the current administration and Congress -- but both of those groups aren't polling too high these days.

He could sweep into office with all the grace and aplomb of Herbert Hoover. And things very well could look just like the Hoover Administration in a short time.
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Roger Kaputnik
post Sep 25 2008, 04:14 PM
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Very interesting, but with the agreement getting reached, all the politicos can say they were against it before they were for it, so they have the sop for the populists, but in the end, they give the money to the plutocrats.

Plus ça change...


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Tim
post Sep 25 2008, 04:25 PM
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So, briefly -

Banking fat cats get greedy and, in doing do, bring the American economy to its knees

Gov't steps in and bails them out

Fat cats get off free while Joe Lunchbox loses his home

As F'd up as that is, it seems we're at a point where no bailout would have for more dire repercussions. For me, it's at a point where it doesn't matter who's at fault - avoiding a prolonged and painful economic downturn must happen at any cost.
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mcstumper
post Sep 25 2008, 09:18 PM
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No insight from our resident economist? Come on SS'er, what do you think?

The Republican in me says let every last one of them fail. The historian can't stop thinking of 1929. I work with a lot of small banks in the Chicago area, none of which seem overly concerned. They've been far more conservative in both their lending and investing practices. I am like Dave, in that I am not well schooled on the issues. If the big banks fail, what is the impact to the average citizen? The FDIC insures deposits. So is the concern that there will be a shortage of money available to be lent? Or is the concern that the decline in value of CMO's will cause a chain reaction of bank failures?


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Dave
post Sep 26 2008, 02:23 AM
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And to add to the chaos, we have Washington Mutual, the largest bank failure in history Thursday night.

And right now it appears that the bailout deal is breaking down because The President's own party doesn't want to support it.

It appears we are all living in interesting times.
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Tim
post Sep 26 2008, 06:30 AM
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Anyone want a free book of blank checks from Washington Mutual - because THAT is where my checking account is. We all just got a "business as usual" form letter - but maaaaaan - that's some scary stuff.
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Southsider2k12
post Sep 26 2008, 06:40 AM
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I'll be honest I am torn on the whole thing. My biggest problem with what is being talked about here is that the root problem isn't being solved. Freddie and Fannie were bad ideas, and the fact that they are being allowed to exist still means this will eventually happen again.

In my eyes the bailout has to happen. I know that no one really wants to give trillions of dollars away (don't believe the $700b figure, it is a low estimate, and it will be blown away, my guess is about 2 trillion) to institutions that have failed, in history we have seen the alternative, and that is depression. In our modern economy lending is 100% vital to everyones life in the US.

Basically banks can only lend on their reserves. If they have bad loans on the books, they can't lend that money out again. It just sits there and doesn't preform. If this happens on a large scale, you get exactly what has happened in Japan. In Japan it is a cultural taboo to write off debt. Banks still have debt on their books from the collapse of real estate in the 80's. Their growth has been pretty much zero since then.

The problem is the idea that the government has set up a lender of last resort, so that the banks don't have to be prudent in what kind of loans they make. Pre-Freddie and Fannie, banks had to be careful of who they lent to because if the loan went bad, it was theirs. Now if a bank made a subprime loan, they just packaged them all up and sold it off to the government. Knowing that they had this option, they took bigger and bigger risks because they "knew" that housing prices were going to keep going up, and even if people defaulted they could either sell the house for a profit, or they could sell this crap back to the government.

My solution is to do the bailout, and it is going to be ugly, but do it very differently.

First of all, blow up Freddie and Fannie. Get rid of them. If you are too big to fail, you are too big period. We also need to make banks responsible for themselves again. I haven't heard nearly enough of the term "moral hazard" over the past year. The Jeffersonian streak in me tells me that when YOU take a risk, YOU pay for the consequences.

Next forget this being a government run institution subject to the politics of the moment, this program should be run through the Federal Reserve Bank, not the Secretary of the Treasury. I won't bore anyone with my partisian view of how we got to this point on the regulatory side, but I'll just sum it up by saying that politicians don't make good economists. Every President since about Jimmy Carter has had a hand in this mess to some extent or another. Leaving this in the Presidents hands of either party is a mistake. Does it make anyone here feel better to know that the same people who run things like Social Security, welfare, unemployment, passports, etc, are going to be the single biggest owners of mortgages in the country. It gives me chills. It also opens the door to the federalization of the mortgage industry, which is the worst thing possible that could come out of this.

Third, I would look at anti-trust regulations to see if some of these banks end up too big after all is said and done. JP Morgan and Goldman Sachs are going to be huge, and fall into that "too big to fail" category after they keep buying up these companies. If we haven't learned our lesson here, shame on us.
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Roger Kaputnik
post Sep 26 2008, 07:16 AM
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Wall Street rescue deal stalemate Please turn on JavaScript. Media requires JavaScript to play.

House Speaker Nancy Pelosi on ABC Good Morning America

Talks to agree a huge $700bn (£380bn) bail-out of the US financial industry have ended in a "shouting match".

After several hours of discussions with President George W Bush, a group of Republican members of Congress blocked the government plan.

The proposal would have seen the government buy bad debts from US banks.

Without a swift rescue package more finance companies are expected to collapse, causing more serious damage to the global economy.

Both sides have agreed to resume talks later on Friday. The leader of the Democrats in the House of Representatives, Nancy Pelosi, told ABC News that she "hoped" a bailout plan could be agreed within 24 hours, because "it has to happen".

Financial markets are gummed up because banks do not know exactly how much bad debt they hold and are therefore reluctant to lend to businesses, consumers and each other.

The fall-out of this credit crunch continues to make a huge impact:
  • The United States suffered its largest bank failure yet, when regulators moved in to close down Washington Mutual and then sold it to US rival JP Morgan Chase for $1.9bn
  • In a co-ordinated move the European Central Bank, the US Federal Reserve, the Bank of England, Bank of Japan and the Swiss National Bank announced new short-term loans to the banking sector worth tens of billions of dollars
  • Banks continued to cut costs, with UK banking giant HSBC saying it would axe 1,100 jobs
  • Shares in UK bank Bradford & Bingley fell another 20% to 17 pence before recovering slightly.
'Full throated discussion'

On Thursday, Democrat and Republican legislators appeared to have struck a deal.

A group of Democrats and Republicans even made a public statement, with Senator Christopher Dodd, chairman of the Senate Banking Committee, announcing that they had reached "fundamental agreement" on the principles of a bail-out plan.




President Bush has lost authority to an extent that must be unprecedented in modern times
Justin Webb
North America editor
But after the White House meeting, the top Republican on the committee, Richard Shelby, told reporters: "I don't believe we have an agreement."

The intense discussions reportedly saw US Treasury Secretary Henry Paulson literally down on one knee, begging Ms Pelosi to help push through the bail-out package.

However, the agreement unravelled when a group of Republican legislators objected to the principle of the plan.

The talks at the White House, led by Mr Paulson and US President George W Bush, then descended into what one participant described as "a full-throated discussion".

Officials with the campaign team of Republican presidential candidate John McCain spoke of "a contentious shouting match".

The Republican critics of the bail-out plan worry about both its cost and how it would involve the government in the financial sector. Instead, they want a government-backed insurance policy for the huge amounts of bad debt built up by US banks.

This proposal, however, was described as "unworkable" both by Democrat politicians and some US government officials.

Doubts over presidential debate

Some Democrats were scathing about the lack of support for the Paulson plan.




FROM THE TODAY PROGRAMME Please turn on JavaScript. Media requires JavaScript to play.


"For House Republicans to take a walk is just appalling," said Democrat Barney Frank.

He later added that the passage of the bill depended on the Republicans.

"It depends on the House Republicans dropping this revolt against the president and cooperating in trying to amend the plan," he said.

The breakdown of talks has put a huge question mark over the first debate in the presidential election campaign in the US.

Democrat candidate Barack Obama and Mr McCain were supposed to meet in Oxford, Mississippi.

But Mr McCain said he wanted to pull out and focus on getting a bailout plan agreed instead. Democrats accused him of posturing and avoiding telling voters how he would solve the crisis.

Bank failure

As the credit crunch continues to bite, regulators moved in and shut down Washington Mutual (WaMu), one of the largest savings and loan institutions in the US. Depositors had withdrawn $16.7bn from the bank during the past 10 days alone.

HAVE YOUR SAY $700bn should pay off a lot of mortgages - bail the people out not the companies Wen Wy, London

They immediately sold on the bank to banking giant JPMorgan Chase for $1.9bn.

"With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business," said the Office of Thrift Supervision.

WaMu had seen its share price drop by more than 80% this year, after suffering considerable losses due to failed mortgages. Earlier this year JPMorgan Chase also bought investment bank Bear Stearns when it faced collapse.

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7636943.stm

Published: 2008/09/26 11:48:22 GMT

© BBC MMVIII


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Roger Kaputnik
post Sep 26 2008, 07:18 AM
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IPB Image US rescue deal: Sticking points

Leading US lawmakers are split over a multi-billion dollar bail-out plan for the US economy. Under the proposals, the government would spend $700bn (£380bn) buying up bad mortgage-related debts from US banks, give the Treasury Secretary powers to oversee the two-year plan and would borrow the cash from the money markets by issuing more government debt.

So what are the sticking points?

OVERSIGHT

The legislation being discussed in Congress will give US Treasury Secretary Henry Paulson sweeping powers to manage the bail-out plan.

However, under the deal currently on the table Mr Paulson will have to report to Congress to update them on progress.

Cash for the bail-out will also be doled out in tranches. Reports suggest the initial slice will amount to $350bn, and each time Mr Paulson needs more cash he will have to return to Congress to ask for it.

Critics fear the unprecedented bail-out will also lead to greater government interference in the corporate world, something Republicans in particular object to.

But both Democrats and Republicans agree that an independent board must make sure the plan is implemented properly.

WALL STREET PAY

Most lawmakers agree that some limit must be placed on the pay of executives at rescued firms.

However, the key stumbling block here is how this will be carried out.

Initially, Mr Paulson had objected to the proposals as he believed company bosses would not agree to the measure.

Now he seems to approve, but only if executives are deemed to be receiving "excessive" pay - although what constitutes "excessive" pay is not clear.

Further questions also remain about how to implement a cap on executive wages and how many firms would be affected by the move.

GOVERNMENT STAKE

Details of what action the government will take and what it should get in return for its investment remain sketchy.

The initial proposal suggested simply buying up illiquid assets - toxic mortgage-related debts the banks can't sell. But critics say this would leave taxpayers liable for any losses of any rescued company.

Meanwhile, buying these assets at above market prices risks transferring wealth to shareholders and executives of institutions that helped trigger the current crisis.

However, current problems mean banks are not just short on liquidity, they are also lacking in capital.

So to boost money in the financial system some experts have suggested that the government should take a stake in at-risk firms instead. Such a move would also allow the government to benefit from any gains made.

However, the question of how much the government should pay for stakes in these troubled firms also remains.

If it buys shares at too low a price it risks a loss in future, while if it buys at too low a price it risks putting off companies from taking part.


HELP FOR HOMEOWNERS

Critics have attacked the plan for bailing out Wall Street but offering no help to homeowners facing foreclosure.

Democrats have demanded foreclosure laws be weakened to allow borrowers facing the loss of their home more time to pay up.

Supporters say it would make no sense for the government to take over troubled mortgages but not attempt to restructure them - a move that would help the beleaguered US housing market and restore investor confidence, they say.

However Republicans have rejected similar calls from the party over the past year, fearing it will make banks more reluctant to issue new mortgages in the future.

Other help for homeowners could include a requirement that mortgage-lenders must make attempts to restructure existing mortgages before moving to repossession.



Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7637365.stm

Published: 2008/09/26 12:51:36 GMT

© BBC MMVIII


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Roger Kaputnik
post Sep 26 2008, 07:19 AM
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IPB Image Bail-out debate: For and against As the debate rages about the US $700bn (£379bn) financial bail-out plan, BBC News looks at the arguments for and against this rescue package.

FOR THE DEAL
  • Global financial stability : the plan is aimed at bringing calm to an extremely volatile global financial system. The world's richest nations, the Group of Seven (G7) say the package will, "protect the integrity of the international financial system".
  • Investor wellbeing : Investors worldwide need a shot of confidence. As billionaire investor Warren Buffett put it: the plan was "absolutely necessary" to help pull the financial system out of an "economic Pearl Harbour".
  • Global slowdown : All sides agree that we want to avoid recession in the world's biggest economy and the knock-on effect that would have for countries that rely on America for trade.
  • Job security : Safeguarding jobs across the economy and preventing bankruptcies that "threaten American families' financial well-being" according to US Treasury Secretary Henry Paulson.
  • Credit freeze : Keeping funds flowing through the money markets so that financial institutions are happy to lend to each other, to businesses and to consumers is vital for any functioning economy.
  • Toxic profits : The $700bn cost of mopping up banks' toxic debts may seem a high price, but when authorities eventually sell these assets in the future, their value may have risen enough to make a profit.
AGAINST THE DEAL
  • Taxpayer burden : The government plans to buy up mortgage-backed assets at its "maturity" value, which is well above the current market value. If the value of these assets does not recover in the next few years, it will get expensive for taxpayers.
  • Ballooning state debt : The plan would swell the budget deficit, which could fuel inflation, economists warn (Mr Paulson has asked to raise state borrowing to $11.3 trillion, from $10.6 trillion).
  • True cost of the deal or how long is piece of string? Since authorities would have the power to buy almost any asset at any price and sell it at any future date, it is almost impossible to calculate the real cost of this deal.
  • Bankers' big pay : There are worries about controlling the mega-bucks bosses earn at the very banks being bailed out - given the view that it was Wall Street "that got us into this mess in the first place".
  • The phenomenal power of US Treasury Secretary Henry Paulson : The rescue plan is his baby and he will control how the $700bn is spent.
  • Too much exposure: Some congressmen object that they want the government to have the right to take a minority stake in any firm that is being bailed out, which would give the state the right to purchase stock in companies in the future.
  • Governance : The plan is a twice-yearly report - critics insist on greater oversight and reporting.
  • Main Street versus Wall Street : There are calls for this package to be extended to help ordinary Americans who are at risk of losing their homes.


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Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7635420.stm

Published: 2008/09/25 15:26:07 GMT

© BBC MMVIII


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Roger Kaputnik
post Sep 26 2008, 07:34 AM
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QUOTE(southsider2k7 @ Sep 26 2008, 07:40 AM) *
I'll be honest I am torn on the whole thing. My biggest problem with what is being talked about here is that the root problem isn't being solved. Freddie and Fannie were bad ideas, and the fact that they are being allowed to exist still means this will eventually happen again.

In my eyes the bailout has to happen. I know that no one really wants to give trillions of dollars away (don't believe the $700b figure, it is a low estimate, and it will be blown away, my guess is about 2 trillion) to institutions that have failed, in history we have seen the alternative, and that is depression. In our modern economy lending is 100% vital to everyones life in the US.

These giant banks that are succumbing to their own business policies are NOT the only sources of credit. There is no reason why other banks that maintained solid practices cannot step into the void, either separately or in combination. We do not need these mismanaged entities per se; others can provide the lubricating function in the economy.



Basically banks can only lend on their reserves. If they have bad loans on the books, they can't lend that money out again. It just sits there and doesn't preform. If this happens on a large scale, you get exactly what has happened in Japan. In Japan it is a cultural taboo to write off debt. Banks still have debt on their books from the collapse of real estate in the 80's. Their growth has been pretty much zero since then.

Pretty much as above--there are still lots of solid banks around; let them into the market.



The problem is the idea that the government has set up a lender of last resort, so that the banks don't have to be prudent in what kind of loans they make. Pre-Freddie and Fannie, banks had to be careful of who they lent to because if the loan went bad, it was theirs. Now if a bank made a subprime loan, they just packaged them all up and sold it off to the government. Knowing that they had this option, they took bigger and bigger risks because they "knew" that housing prices were going to keep going up, and even if people defaulted they could either sell the house for a profit, or they could sell this crap back to the government.

They assumed the gov't would buy this "crap" and until the Congress has been hitting the brakes these last few days, that was a good assumption. The faster Congress acts, the truer the assumption becomes.

My solution is to do the bailout, and it is going to be ugly, but do it very differently.

First of all, blow up Freddie and Fannie. Get rid of them. If you are too big to fail, you are too big period. We also need to make banks responsible for themselves again. I haven't heard nearly enough of the term "moral hazard" over the past year. The Jeffersonian streak in me tells me that when YOU take a risk, YOU pay for the consequences.

That exactly is the underlying feeling, the gut instinct, that makes people call up their reps and senators to weigh in against the bail-out.


Next forget this being a government run institution subject to the politics of the moment, this program should be run through the Federal Reserve Bank, not the Secretary of the Treasury. I won't bore anyone with my partisian view of how we got to this point on the regulatory side, but I'll just sum it up by saying that politicians don't make good economists. Every President since about Jimmy Carter has had a hand in this mess to some extent or another. Leaving this in the Presidents hands of either party is a mistake. Does it make anyone here feel better to know that the same people who run things like Social Security, welfare, unemployment, passports, etc, are going to be the single biggest owners of mortgages in the country. It gives me chills. It also opens the door to the federalization of the mortgage industry, which is the worst thing possible that could come out of this.

Since I am against the bail-out, I do not think any gov't entity should be running it! At any rate, I am four-square with you on the distrust of the gov't.



Third, I would look at anti-trust regulations to see if some of these banks end up too big after all is said and done. JP Morgan and Goldman Sachs are going to be huge, and fall into that "too big to fail" category after they keep buying up these companies. If we haven't learned our lesson here, shame on us.

Yes, yes, a thousand times, YES!


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post Sep 26 2008, 07:47 AM
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I don't think the general public grasps the fact that there isn't enough private money out there to keep economy going. There are not enough "solid" banks around to support the country right now.

Its sounds good in theory, but we are looking at what is remarkably close to the same set of circumstances that led into the Great Depression. If some sort of a bailout doesn't happen, the economy will collapse. It sounds simplistic, but history bears me out. Go back and read up on the technical aspects leading into the Depression, specifically when the Bank of New York (then the defacto fed bank) quit lending, and even worse, started foreclosing on everyone. This is 1929 all over again, and we have a chance to do this the right way, instead of waiting over a decade to get out of it.



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post Sep 26 2008, 08:07 AM
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Thanks. Do you have any good references or sources for that info? And aren't there more safeguards now that would put the brakes on the spread of panic? And aren't there more banking centers now than then?


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QUOTE(Roger Kaputnik @ Sep 26 2008, 09:07 AM) *

Thanks. Do you have any good references or sources for that info? And aren't there more safeguards now that would put the brakes on the spread of panic? And aren't there more banking centers now than then?


I don't have any good sources off of the top my head. I had an excellent Econ History class in college years ago, and lots of that knowledge sticks from then. I would google Bank of New York and Great Depression, and I am sure you would find good stuff.

There are more safeguards today, but the biggest thing of all is that there has to be liquidity in the system. The Fed has been pumping money in, but the whole system is in danger. If there is no money, the country doesn't move. Like I said, Japan is the perfect case study for that.

There were actually WAY more banks back in the day, and there wasn't nearly the amount of laws governing them. They also failed pretty regularly in the days before FDIC. People aren't going to lose their money because their bank goes under, they are going to lose their jobs because the companies they work for won't be able to get loans to do regular business. The immediate effects won't be felt by the general public, but will come as secondary effects of the corporate world's problems.
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Just remember when this plan ends up being a disaster, these are the people who were voting on it...

http://mobile.washingtonpost.com/detail.js...p;p=1&all=1

QUOTE
But Democratic leaders, who said they hope to approve the bailout plan by the end of the week, were having their own trouble rallying the rank and file. House Democrats summoned to a lunchtime meeting to discuss the proposal yesterday received a glossary of financial terms, such as "credit default swap" and "illiquid assets."
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