The evolving bailout plan

Written by  //  September 30, 2008  //  Economy, Government & Governance, Public Policy, U.S.  //  1 Comment

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Banking’s crisis of confidence deepens
Wall Street rebounded in spite of a worsening crisis of confidence in the global banking system, as leaders of the US Congress moved to try to salvage the Bush administration’s $700bn (£385bn) bail-out plan. A proposal to increase the ceiling for government insurance on bank deposits to $250,000 emerged as the best hope of swaying reluctant Republicans and Democrats who voted against the bill on Monday.
Senate Leaders Agree on Bailout Vote Tomorrow Night
Sept. 30 (Bloomberg) — Senate Democrats and Republicans have agreed to vote tomorrow night on a $700 billion financial- rescue plan, amid evidence that voters and lawmakers regretted yesterday’s U.S. House rejection of the bailout.
Finger pointing begins
(AP/Globe & Mail) SAO PAULO — Astounded by the U.S. government’s failure to resolve the financial crisis threatening the foundations of the global free market, fingers of blame are pointing at the United States from around the planet.
Congress Confronts Its Contradictions
George Monbiot in The Guardian
Corporate welfare is a consistent feature of advanced capitalism. Read and weep
29 September
The House of Representatives voted on Monday to reject a $700 billion rescue of the financial industry. The vote against the measure was 228 to 205. Supporters vowed to try to bring the rescue package up for consideration again as soon as possible.
Stock markets plunged sharply at midday as it appeared that the measure would go down to defeat. House leaders pushing for the package kept the voting period open for some 40 minutes past the allotted time, trying to convert “no” votes to “yes” votes by pointing to damage being done to the markets, but to no avail.
Transcript of Speaker Pelosi’s Speech
Republicans point finger of blame at House Speaker Nancy Pelosi for ‘partisan’ speech
(The Scotsman) House Republicans blamed a “partisan” speech by the Speaker, Nancy Pelosi, a Democrat, during the debate. She had blamed George Bush’s “reckless economic policies”, “fiscal irresponsibility” and an “anything goes economic policy” for the crisis.
Opening Step on Long Road
In Bailout Vote, a Leadership Breakdown
(NYT) WASHINGTON — The collapse of the proposed rescue plan for the teetering financial system was the product of a larger failure — of political leadership in Washington — at a moment when the world was looking to the United States to contain the cascading economic crisis.
(NYT News Analysis) The government’s planned financial bailout is a significant if costly step intended to avert economic calamity, but it may not be the last one, according to economists and finance experts.
The FP Morning Brief: Congressional leaders agree to bailout plan
Following a weekend of tense, high-stakes negotiations, U.S. congressional leaders unveiled an unprecedented $700 billion bailout plan for the financial industry.
The resulting 110-page bill (pdf) gives Treasury Secretary Henry Paulson and his successor sweeping authority to purchase a broad array of financial assets. It includes limits on executive pay and greater oversight but will not, as Democratic lawmakers hoped, give bankruptcy judges new authority to rewrite mortgages.
In one key change, the federal government will have the power to recoup any losses from the financial industry after five years. But “the Treasury secretary got almost everything he sought” in the end, the Los Angeles Times reports.
“This plan sends a strong signal to markets around the world that the United States is serious about restoring confidence and stability to our financial system,” said President George W. Bush in a statement.
“We sent a message to Wall Street – the party is over,” declared House Speaker Nancy Pelosi. “If we don’t pass it, we shouldn’t be a Congress,” added New Hampshire Republican Sen. Judd Gregg.
But serious opposition remains, especially within the GOP. “Its net effect is still a huge bailout of the financial sector that will snuff out the free market system,” complained Florida Republican Rep. Connie Mack. The House of Representatives votes on it today.
Meanwhile, the financial crisis is rippling through the global economy. European regulators moved to rescue top banks in Britain and Belgium, and IMF Managing Director Dominique Strauss-Kahn is calling for “a global response” to handle the fallout for developing countries. “Laissez-faire is over,” says French President Nicolas Sarkozy.
28 September
Bailout Plan in Hand, House Braces for Tough Vote
The measure still faced stiff resistance from Republican and Democratic lawmakers who portrayed it as a rush to economic judgment and an undeserved aid package for high-flying financiers who chased big profits through reckless investments.
With the financial package looming as a final piece of business before lawmakers leave to campaign for the November elections, leaders of both parties in the House and Senate intensified their efforts to sell reluctant members of Congress on the legislation.
All sides had to surrender something. The administration had to accept limits on executive pay and tougher oversight; Democrats had to sacrifice a push to allow bankruptcy judges to rewrite mortgages; and Republicans fell short in their effort to require that the federal government insure, rather than buy, the bad debt.
US legislators agree on rescue plan
(Al Jazeera) US congressional leaders have reached a tentative agreement on a proposed $700bn taxpayer bail-out for the country’s troubled financial sector. The deal includes numerous safeguards added to the original proposal by the Bush administration, including protection for taxpayer dollars and curbs on executive salaries.
McCain, Obama Urge Lawmakers to Support Rescue Plan
Sept. 28 (Bloomberg) — Republican presidential nominee John McCain urged lawmakers to “swallow hard” and support a $700 billion rescue proposal that is being drafted this weekend and could come to a vote as early as tomorrow.
… The White House also agreed to strict oversight of the program by a Congressional panel and conflict-of-interest rules for firms hired by the Treasury to help run the program.
The administration had initially requested virtually unfettered authority to operate the bailout program.
A bailout won’t wreck economy
Irwin Stelzer
(Times Online Analysis) The huge sums the government has already shelled out, and will in the future pay to buy dud loans from the banks, are not “spending” as that term is generally understood. These billions are not being ploughed into some welfare programme. In return for its cash the government is getting assets — not the world’s best assets, but assets that are far from valueless.
Wall Street, R.I.P.: The End of an Era, Even at Goldman
The huge bailout package being debated in Congress may succeed in stabilizing the financial markets. But it is too late to help firms like Bear Stearns and Lehman Brothers, which have already disappeared. Merrill Lynch, whose trademark bull symbolized Wall Street to many Americans, is being folded into Bank of America, located hundreds of miles from New York, in Charlotte, N.C.
For most of the financiers who remain, with the exception of a few superstars, the days of easy money and supersized bonuses are behind them. The credit boom that drove Wall Street’s explosive growth has dried up. Regulators who sat on the sidelines for too long are now eager to rein in Wall Street’s bad boys and the practices that proliferated in recent years.
Tragedy in the Making in Washington and on Wall Street: The Canadian Solution
Rodrigue Tremblay
offers an interesting option [see Comment #1 for a contrary – not contrarian – view from our Wednesday Night expert on the “Crawford Solution”]
27 September
Consensus on Wall Street Rescue Plan Is Said to Be Near
Officials said that the core of the proposal put forward by the Treasury secretary remained intact, and that a deal might be announced on Sunday evening.
Glaring gaps in the financial system
By Thomas I Palley, founder of the Economics for Democratic and Open Societies Project
(Asia Times Online) The reality is there are fundamentally different models for addressing the financial crisis. Each has strengths and both have weaknesses. Time is needed to deliberate on them, and congress should not be stampeded into a decision. Nor should congress hand over a $700 billion check, particularly to the George W Bush administration in its waning days.
Finally, both the Paulson and recapitalization models deal only with the supply of finance. Neither deals with the problems of re-regulating finance, jump-starting the economy, and ensuring the economy delivers shared prosperity that escapes the trap of relying on debt and asset price inflation to drive growth.
It is no good fixing the supply of finance if there is no demand for finance or if the demand for finance is based on rotten foundations. That is why helping Main Street is as essential as bailing out the banks.
Behind Insurer’s Crisis, Blind Eye to a Web of Risk
an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.
Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.
Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.
26 September
Talks Implode During a Day of Chaos; Fate of Bailout Plan Remains Unresolved
WASHINGTON — The day began with an agreement that Washington hoped would end the financial crisis that has gripped the nation. It dissolved into a verbal brawl in the Cabinet Room of the White House, urgent warnings from the president and pleas from a Treasury secretary who knelt before the House speaker and appealed for her support.
Where Are the Grown-Ups?
Paul Krugman
The Congressional plan, then, looks a lot better — a lot more adult — than the Paulson plan did. That said, it’s very short on detail, and the details are crucial. What prices will taxpayers pay to take over some of that toxic waste? How much equity will they get in return? Those numbers will make all the difference. This has to be a bipartisan plan, and not just at the leadership level. Democrats won’t pass the plan without votes from rank-and-file Republicans — and as of Thursday night, those rank-and-file Republicans were balking.
25 September
Lawmakers Agree on Outline of Bailout
WASHINGTON — House and Senate negotiators from both parties said Thursday that they had reached general agreement to move forward with the administration’s proposed $700 billion bailout of the financial system, authorizing unprecedented government intervention to prevent what President Bush warned could be a widespread economic collapse.
(BCA Research) Most equity investors are not yet convinced that the Paulson/Bernanke fiscal plan will work, but one cash-rich investor is stepping up.
Famed value investor, Warren Buffett, is putting some of his cash hoard to work by buying a sizable stake in Goldman Sachs, creating some lift in global equity markets. This development partly offset this week’s market sell-off driven by the disappointment that the the budding U.S. fiscal bailout plan is running into stiff Congressional headwinds. While the plan is not yet fully worked out, it does not seem to be as encompassing as was hoped late last week. Still, some value investors are nibbling at stocks, and equity buyback announcements are accelerating, underscoring that the market is reasonably priced IF the economy does not sink into a black hole. This remains a big IF, given the lack of trust in the banking system and relentless erosion in housing prices.
Lawmakers Seem Near Deal on Bailout
Democrats said they were now looking to secure Republican agreement before brokering a final deal with the Bush administration, in particular a plan to authorize the full $700 billion but to disburse a smaller sum at first, perhaps $150 billion, to get the rescue effort under way. More money would follow after assessment of the program.
Democrats were hoping to reach a final agreement on the framework of a bill ahead of  [the White House] meeting, partly to deny any credit to Mr. McCain, who took the bold step on Wednesday of suspending his campaign and announcing that he would return to Washington to help secure a deal. Democrats said they did not need his help.
24 September
CEO Clawback Provisions in the Bailout?
With Congress recognizing the public’s dismay over this massive taxpayer giveaway, we are starting to see some serious questions about the folks who drove the financial ship of state aground.
Bush and Candidates to Meet on Bailout
WASHINGTON — President Bush appealed to the nation Wednesday night to support a $700 billion plan to avert a widespread financial meltdown, and signaled that he is willing to accept tougher controls over how the money is spent.
Mr. Bush’s televised address, and his extraordinary offer to bring together Senator Barack Obama, the Democratic presidential nominee, and Senator John McCain, the Republican, just weeks before the election underscored a growing sense of urgency on the part of the administration that Congress must act to avert an economic collapse.
Could Warren Buffett Negotiate a Better Deal for Taxpayers?
By David Leonhardt
(NYT) Mr. Buffett swooped in on Tuesday evening and announced that his company, Berkshire Hathaway, was investing $5 billion in Goldman Sachs, money that would help the firm — which made far fewer bad investments than most of Wall Street — shore up its balance sheet. What will he receive in exchange for his investment? Something like a 7 percent stake in the firm.
Mr. Paulson, of course, has a different objective than Mr. Buffett. The Treasury secretary is trying to resuscitate the country’s financial system and keep the economy from falling into a deep recession. If he drives too hard a bargain, he won’t solve the problem. Mr. Buffet is merely trying to make some money.
But to the many critics of the Paulson plan, the juxtaposition of the Goldman deal and the proposed bailout crystallize the problems with the plan. The critics are worried that the government is taking on too much risk with too little upside. And they can’t help but notice that other governments that faced similar crises in recent decades — in Japan and Sweden — struck deals that looked more like Mr. Buffett’s than Mr. Paulson’s.

One Comment on "The evolving bailout plan"

  1. Diana Thébaud Nicholson September 27, 2008 at 3:57 pm ·

    This comment on Professor Tremblay’s article comes from our resident expert on the ABC Paper fiasco in Canada. DTN
    The [Purdy] Crawford [otherwise known as the Pan-Canadian Investors Committee for Third-Party Structured ABCP] exercise (executed by JP Morgan, but that is not advertised) is using the federal bankruptcy law to shift the capital loss onto whoever held the defective paper on Aug. 13 2007, with relief provided only to that small proportion of the total holdings which was purchased and held directly (subject to a modest maximum) by individuals. If the same individual bought the same paper through a pension fund, he is stuck with the loss.The big gainers from all this are the banks who perpetrated all this,who under Crawford cannot now be sued for damages.The big losers are the Caisse $14B, the Federal Civil Servants Pension Plan $3B, a small number of corporate pension plans, AIR TRANSAT, Jean Coutu, The Montreal Airport Authority, but not the banks, unless they were caught holding the paper on the critical date, or subsequently repurchased it from their senior executives. That is why the Government of Canada can proudly point to our solid banks, who simply shifted the loss to others. (Crawford imposed a tax which is not called a tax.) How the Supreme Court of Canada could be persuaded to refuse to hear the appeal of the losers, is not entirely clear to me.
    By contrast, in the US the banks were forced to absorb the (much larger) losses.The resulting uncertainty as to counterpart risk (who is still solvent?) led to a breakdown in interbank lending, thus the whole credit mechanism.The bailing out exercise, if successful, has to create sufficient confidence in the solvency of (some?) institutions so that the lending activity in the capital markets can resume.The funding will have to be based on “the faith and credit of the United States” because no one else can do it.
    Handing pieces of paper representing deferred claims of unknown value on a bankruptcy liquidation cannot possibly do that job. As a result, the problem being addressed would not be solved.

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