Monday, September 29, 2008


Portland Press Herald - The state of Maine could not float a $50 million transportation bond this week because traders told officials there was "no market" at all for large financial transactions such as this one. . . "In 34 years I have never had a trader say, 'I can't give you a sale price. There is no market,' " said Maine Municipal Bond Bank Executive Director Robert Lenna, describing his efforts to sell the bond on Wall Street. A week ago, Lenna said, the interest rate for the AA-rated revenue bond would have been about 3.8 percent or 3.9 percent. But on Tuesday, short-term interest rates, a factor used to calculate interest rates for municipal bonds, soared as high as 9 percent and 10 percent, effectively shutting down market activity.

Our Future - Representatives from top progressive and labor groups-- including the Campaign for America's Future, AFL-CIO, SEIU, AFSCME, AFT, NEA, ACORN, Alliance for Justice, Center for American Progress and Center for Community Change -- met at an emergency closed-door meeting yesterday to develop a statement of principles for bailing the American economy out of its financial woes:

1. Public Oversight. This kind of power can never be centralized in a single individual - much less one who did not even stand for election. Any funds must be controlled by an independent entity, with consumers and workers given seats on its board. Congress should be empowered to name independent monitors and to approve all board members.

2. Protect the Taxpayer. The Treasury bill would have taxpayers buying paper that nobody else wants at prices far above its current value. If a firm wants to auction off its toxic paper to the US Government, taxpayers should get equity in that firm equal to any amount paid in excess of the paper's value. This will deter profitable firms from using the government as a dumpster for their toxic paper. And it will insure that if the bailout works and the firms become profitable, taxpayers, not simply bankers, benefit from the upside.

3. Curb the casino. This crisis was caused because sensible regulations of the banking system that worked for dozens of years were dismantled or went unenforced. No bailout can go forward without requiring the necessary regulation to insure this does not happen again. Any institution, which receives assistance, should agree to come under a microscope going forward in terms of disclosure requirements, and it should have stringent capital requirement imposed upon it.

4. Invest in the real economy. Ending the bankers' strike is not sufficient enough to avoid the recession into which we have been driven. Major public investment in new energy and conservation, rebuilding schools and infrastructure, extending unemployment and food stamps, helping states avoid crippling cuts in police and health services - is vital to get the real economy moving and put people back to work. No bailout should proceed without being linked to support for a major public investment plan to get the economy going.

5. Hold CEOs and Boards of Directors Accountable. Wall Street CEOs shouldn't be pocketing millions while taxpayers are forced to bail them out. Any firm that applies for relief must agree to cancel all stock option programs and CEOs should have stringent limits placed on their compensation until the Company has repaid all taxpayer assistance.

6. Aid the victims, not just the predators. Both bankers and home owners made foolish bets that home prices would keep rising. Many homeowners, however, were misled by predatory lenders into taking mortgages that they didn't understand and couldn't afford. It would be simply obscene to help the predators and not those that they preyed upon. No bail out of the banks should take place without measures to help people in trouble stay in their homes. Explicit provisions should ensure use of the full array of financial and legal tools available to the government to stop foreclosures and restructure home mortgage loans for ordinary Americans, including amending the bankruptcy code to allow judges to modify mortgages. Where workouts are not feasible, people should be allowed to stay in their homes as renters.

Joseph E. Stiglitz, Nation - There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.

The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense.

The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

Michael Hudson, Counterpunch - These bad loans are toxic because they can only be sold at a loss - if at all, because foreign investors no longer trust the U.S. investment bankers or money managers to be honest. That is the problem that Congress is not willing to come out and face. Many of these loans are outright fraudulent. And they are being sold by crooks. Crooks who work for banks. Crooks who use accounting fraud - such as the fraud that led to the firing of Maurice Greenberg at A.I.G. and his counterparts at Fannie Mae, Freddie Mac and other companies engaging in Enron-type accounting.

This is not what the magic of compound interest promised. But it is where it had to end up, with mathematical inevitability. It was an advertising come-on for Wall Street money managers and promoters of "pension-fund capitalism" (or "peoples' capitalism" as it was called in Chile by the Chicago Boys working for General Pinochet's murderous regime, and Margaret Thatcher's Conservatives in England). The promise is that if people consign these funds to individuals who make much, much more than they do but have the survival-of-the-fittest advantage of being much, much more greedy, they will receive a perpetual doubling of interest. That is how retirements for American workers are still supposed to be paid - by magic, not by direct investment. Prospective retirees are supposed to ensure a good life by investing savings in loans to corporate raiders who fire, lay off, downsize and outsource these very workers. The trick is to persuade employees to hand retirement funding over to financial managers whose idea was to make money off the economy by extracting interest and dividends off workers, homeowners and companies being bought on debt leverage. In the final analysis it is debt leverage by itself that is supposed to fuel capital gains.

This has led to madness. The maddest solution of all would be for the government to give the extractive financial sector even more money - funds that no private lenders have been willing to provide, not even vulture funds. No private firm has been able to discover what Mr. Paulson and the unfortunate Mr. Bernanke are sanctimoniously promising: that a viable deal, even an almost money-making one, can be made by buying junk now and waiting for "the economy" to make it good. . .

Promises that "taxpayers" will be able to recover a large part of this money are a fiction. If there were a hope of recovering this money, then investors abroad - foreign buyout funds, foreign banks, foreign sovereign wealth funds - would have been willing to buy Bear Stearns, Lehman Brothers, A.I.G. and other companies at some price. But they wouldn't touch this at any price. . .

Here's why the government giveaway logic is fallacious: It's a giveaway, not a bailout. A bailout is designed to keep the boat afloat. But the existing Wall Street boat crafted by the investment bankers seeking to unload their junk must sink. The question as it sinks is simply who will be able to grab the lifeboats, and who drowns.

There is a reason why the banks won't lend: Housing and commercial real estate already are so heavily mortgaged that there is no rental value available (over and above operating expenses, current taxes and debt service) to pledge to the banks. It still costs more to buy a house than to rent it. No increase in the amount of credit, short of hyper-inflation can cure this. No lowering of interest rate, will lead banks to risk making a bad new loan - that is, a loan that probably will go bad and end up with the bank taking a loss after the borrower walks away or defaults. . .

Here's the problem with following Mr. Paulson's orders and lending yet more: Every major real estate advisor on record has forecast a further drop of between 20 to 30 percent in property prices over the coming twelve months. This is now the standard forecast. It means that over and above the five million arrears and foreclosures that Mr. Paulson acknowledged already are on the books, yet more families are to give up the fight by this time next year. Is the $700 billion giveaway fund to try and recoup by evicting them too from their houses - to pay the "taxpayer" enough to bail out Countrywide, Washington Mutual and other predatory lenders for loans that state Attorneys General have accused of being fraudulent?

For the government to even begin to recover some of the value of the $700 billion in junk mortgages it has bought would force new homebuyers to pay even more of their income to the banks. And if they do that, they will have less income to spend on goods and services. The domestic market will shrink, and tax revenues will fall at the state, local and federal levels. The debt overhead will deflate the economy, causing shrinkage all down the line.

It is necessary, even inevitable, for the volume of debt to come down - not up - to restore equilibrium. The economy was well on its way to preparing the ground for this last week. As Alan Meltzer of the American Enterprise Institute (of all places) explained on McNeill-Lehrer, Merrill Lynch was able to be sold at 22 cents on the dollar; and the economy survived Lehman Brothers and Bear Stearns being wiped out.

Such debt writes-offs are a precondition for writing down America's mortgage debts to levels that are affordable. But Mr. Paulson's plan is to fight against this tide. He wants the Wall Street to keep on raking in money at the expense of the economy at large. These are the big banks who lobbied Congress to appoint de-regulators, the banks whose officers paid themselves enormous bonuses and gave themselves enormous golden parachutes. They were the leaders in the great disinformation campaign about the magic of compound interest. And now they are to get their payoff. . .

It gets worse. If Congress should be so destructive as to buy out $700 billion of bad loans (for starters), the sellers will do just what Russia's kleptocrats did. They will take their money and move it abroad to a "hard" currency country. This will help collapse the dollar. Up will go gasoline costs and prices for other imports. America will be turned into a Russian-style post-Soviet economy, having endowed a new domestic kleptocracy of insiders, who use some of their gains to finance the campaigns of American Yeltsins such as McCain.

So let us admit that the economy has been taking a wrong track for a number of decades now. As John Kay noted : "When the dust settles, many banks and hedge funds will have lost more money on their trading activities in the past year or so than they had made in their entire history . . . The pursuit of shareholder value damaged both shareholder value and the business."

Peter J. Solomon & Anders J. Maxwell - Secretary Paulson has united the country - in opposition to the bill to bail out the global credit markets and, as usual, the country's got it right. . . Simply stated, the $3.5 trillion commercial paper market - which finances the short-term credit of U.S. corporations - is on the brink of drying up, the result of which would be a run on the already illiquid banking system. . .

The markets need funding - but like Warren Buffet just provided to Goldman Sachs and the Treasury provided AIG. The Treasury's plan may provide instant liquidity, but it fails to address the underlying issue; namely, the markets need the funding necessary to support refinancings. Paulson's plan fails to address this instant requirement. Ironically, it risks another round of misvaluation of assets at the expense of the U.S. taxpayer, usurps the market's role of price setting, and removes accountability and prospects for eventual loss or gain from the managements and investors who placed these bets in the first place.

The Depression era Reconstruction Finance Corporation was a successful model from 1929 through WWII. It accomplished funding of illiquid and under capitalized private companies such as banks by investing in preferred stocks. The RFC invested $3 billion and got back $3 billion. It was an independent agency with legislative over-sight. It was run professionally.

The Administration has chosen as its model the Resolution Trust created in the 1980's to handle the savings and loan crisis. It was run by the Treasury. Taxpayers lost almost $300 billion. The market was too smart for even the best of our politicians and bureaucrats. Private sector sharpies picked the Treasury's and taxpayers' pockets. . .

Alternatively, follow Buffet's example. Invest the $700 billion in viable financial institutions deemed beneficial to the public interest. Delegate decisions to experienced and disinterested professionals - not politicians.

This and subsequent Administrations and Treasury Secretaries have no business setting the values of securities. The magnitude and risk of the undertaking demand an equity return for taxpayers. Neither of these prerequisites is respected by the current Plan. It's bad politics and it's bad business.

Michael Lewis, Bloomberg - One of the things they say is that, in leaving Goldman for government service, Paulson made the greatest trade of his life. Not only was he required to sell his half-billion dollars in Goldman stock near the high, but also, as Treasury Secretary, he was exempt from capital-gains taxes. By getting out of Goldman while the getting was good, the guy may have doubled his net worth. . .

Think of Wall Street as a poker game and Goldman as the smartest player. It's sad when you think about it this way that so much of the dumb money on Wall Street has been forced out of the game. There's no one left to play with. Just as Goldman was about to rake in its winnings and head home, the U.S. government stumbles in, fat and happy and looking for some action. I imagine the best and the brightest inside Goldman are right this moment trying to figure out how it uses the Treasury not only to sell their own crappy assets dear but also to buy other people's crappy assets cheap.

At any rate, it won't take long for Goldman Sachs to figure out how to make that $700 billion work for Goldman Sachs. This you can trust them to do. After all, Warren Buffett just did.

SF Chronicle - A year ago, as The Chronicle began portraying the strange world of subprime and explaining why people suddenly were so worried about foreclosures, it profiled four Bay Area families facing the loss of their homes, telling their personal stories and tracing the history of their loans. All had subprime mortgages that were clearly unaffordable, with monthly payments that ate up almost their entire income, leaving next to nothing for food, gas or utilities. . .

One homeowner, Johnny Pitts, was a Muni bus driver who had bought an Oakland home for $429,950 in 2005. His mortgage payment, which had started at $2,880, was about to reset to $3,730 a month - plus $750 more for taxes and insurance. Home payments are supposed to be no more than 40 percent of income. By that formula, the necessary income would have been $11,200 a month or $134,400 a year. . . In fact, Pitts's take-home pay was just $4,000 a month. Loans both 100 percent.

The other homeowners, Jeff and Vanessa Hahn of Fairfield, were on the hook for monthly payments of $5,000 - exactly the amount they earned together as a self-employed businessman and teacher.

As for loan to value, in both cases it was 100 percent - hardly a desirable ratio. Pitts had a piggyback second loan; together the two loans accounted for the full purchase price. The Hahns had done a cash-out refinance for their home's full assessed value of $570,000 in March 2007, a few months before the article was written. . . Both borrowers had tarnished credit. Presumably, that high risk was why they both received "low introductory rate" mortgages that started at just above 10 percent.

Letter from a large group of economists - As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. . .

1) Its fairness. The plan is a subsidy to investors at taxpayers' expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

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