Follow The Lobbyists: They Strongly Oppose The Dodd Bill

Now that everyone agrees that lobbyists are bad, shouldn't we do exactly what they are arguing against? dday points to this Hill article reporting that the bank lobbyists are in a panic over the Dodd bill:

One congressional reaction that emerged — Senate Banking Committee Chairman Chris Dodd’s (D-Conn.) response to the rescue package — wasn’t favorable to many of K Street’s banking clients, who oppose one provision in particular: giving bankruptcy judges the power to lower mortgages for distressed homeowners.

“We are vigorously opposing that,” said Steve Verdier, a lobbyist for the Independent Community Bankers Association (ICBA). “If that happens, then the mortgage rates for other consumers are going to go up.” ICBA sent out a new “issue alert” to its members on Monday in response to the Dodd proposal, and encouraged members to send a new letter to Capitol Hill even if they already signed a grassroots message on the ICBA website. “‘Hit ’em harder’ is our message,” Verdier said.

The American Bankers Association joined in the criticism of the so-called “cram-down” provision. “Authorizing write-downs of mortgages by bankruptcy judges will increase the risks of mortgage lending at a time when the market is already struggling” the ABA said in a letter it sent to Capitol Hill on Monday.

So it is the Bankers vs. The American People now. Hit the people harder is the bankers' message. Here is what the American People need:

Consumer and labor groups, meanwhile, welcomed additional homeowner protections in Dodd’s bill that were not included in the Treasury Department’s proposal. “We cannot support, and urge you to oppose, legislation that fails to help the millions of families in danger of losing their homes, while spending hundreds of billions of dollars of taxpayer money to bail out those who caused the problem,” groups like the NAACP, National Fair Housing Alliance, and the Service Employees International Union wrote lawmakers on Monday.

The bankers do not care:

Banking lobbyists said once Treasury takes control of securities it will have the power to change the terms of the underlying mortgages. But that shifts the financial costs of reducing the price of the loans to the taxpayer rather than the shareholders in the bank that made the bad loans in the first place.

In addition to the added bankruptcy protection, labor groups pressed Congress to include a second stimulus package as part of the bailout bill. “Any taxpayer bailout of Wall Street must be balanced with economic relief for ordinary Americans dealing with the economic consequences of Wall Street’s outrageous conduct and the government’s own inaction,” AFL-CIO President John Sweeney told congressional Democrats in a letter.

As d-day says, follow the lobbyists.

By Big Tent Democrat, speaking for me only

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    Well, if the bankers cannot agree (5.00 / 3) (#1)
    by scribe on Tue Sep 23, 2008 at 12:37:24 PM EST
    to helping out, then they are un-American.

    And they should be made to wait for any bailout.

    Until after the election, when it can be considered more carefully.

    Remember - if it needs a hard sell, it isn't worth buying.

    If it needs a hard sell... (none / 0) (#2)
    by blogtopus on Tue Sep 23, 2008 at 12:43:04 PM EST
    I love that maxim... good one, Scribe.

    I'm sending this TL post to my friends. Favorite line is Bankers vs. American People.

    [/empty comment]


    I'll take the thanks, but not the credit (none / 0) (#8)
    by scribe on Tue Sep 23, 2008 at 12:54:42 PM EST
    for coming up with it.  I heard it in an old interview tape that had to be 40 or 50 years old - can't even remember who said it, some salesman, I think.

    But they were right.  Good stuff sells itself.  Bad stuff needs a hard sell.


    With all respect, (none / 0) (#58)
    by ChiTownDenny on Tue Sep 23, 2008 at 06:16:39 PM EST
    did your read "The Hill"?  Lobbyists are now involved.  Very disappointed with Congress, now that they're campaign fundraising is the priority.  
    I'm about to move to Canada, or just put my money under my matress!  Of course, I'm trying to save my retirement, like millions of us, before I decide.

    So are the banks saying that they (none / 0) (#4)
    by litigatormom on Tue Sep 23, 2008 at 12:46:36 PM EST
    would rather have more foreclosures than restructured mortgages that actually get paid?

    They claim that the ordinary consumer will be hurt by rising interest rates if mortgage restructuring is allowed?  Won't they be hurt by rising interest rates -- or the unavailability of loans altogether -- if the current foreclosure rate continues or increases?

    The Dodd package doesn't permit any old homeowner to restructure their mortgage. As I understand, it only applies to homeowners in bankruptcy. People don't like going into bankruptcy if they can afford to pay their existing mortgages as they are.


    You've got to remember that (5.00 / 1) (#9)
    by scribe on Tue Sep 23, 2008 at 12:59:47 PM EST
    when someone goes into bankruptcy, they have to go through a payment plan.  

    As it stands now the banks either get the full payment they have on the mortgage written into that plan, or the foreclosure goes through and they get to sell the property.  Whether there would be a deficiency judgment (the difference between the price at the foreclosure sale and the amount owed on the mortgage) and whether that would be folded into the bankruptcy or survive - another matter.

    But, if they foreclose, then the bankers' cousins-in-law and assorted bottom-feeders can buy the property and make money on it.

    The Dodd plan would allow modifying the terms and conditions and would require that the people get fixed-rate interest on the re-formed mortgages.  Which would just kick all the teeth out of those ARMs that go up from the 1% teaser rate to 8 or 10 or 15 percent - and in so doing kick the bankers' teeth in, too.


    Well yes (none / 0) (#15)
    by litigatormom on Tue Sep 23, 2008 at 01:26:31 PM EST
    Yes, as a secured creditor, a mortgage lender either gets paid in a bankruptcy or gets the property.  But most of the time, banks don't like getting stuck with properties in a falling market. They'd rather get paid, even if the payout is on less favorable terms. All the Dodd proposal does is increase the borrower's leverage in agreeing to such a deal -- right now it's at the banks' grace. And the banks bear responsibility for lousy underwriting.

    To say, oh no, you can't make us restructure the loans because that would raise interest rates on other borrowers -- that's just not credible. Right now, credit is much tighter even for people who are good credit risks. If the banks have to raise interest rates in order to do responsible underwriting, what's the problem with that?  Better than a $700 billion unconditional transfer of $$ from taxpayers to Wall Street.


    And the Dood bill defines (none / 0) (#20)
    by scribe on Tue Sep 23, 2008 at 01:36:23 PM EST
    what the rates shall be.  I don't have it handy (it's in the bill), but it's relatively favorable and it allows a reasonable amount for risk.

    Dodd bill, not Dood bill. (none / 0) (#21)
    by scribe on Tue Sep 23, 2008 at 01:36:50 PM EST

    If it helps ordinary people, (none / 0) (#46)
    by Realleft on Tue Sep 23, 2008 at 03:49:01 PM EST
    then maybe the Dood bill would be a good name for it!

    If a rescue exists (none / 0) (#35)
    by Militarytracy on Tue Sep 23, 2008 at 02:38:44 PM EST
    it makes it less likely that they will be able to wring the last of the blood from the turnip.  Most of these mortgages were thought to be okay to make because the new bankruptcy laws made us all into turnips with blood if you squeezed hard enough long enough until the day we died.

    What does Biden say? (5.00 / 1) (#5)
    by oldpro on Tue Sep 23, 2008 at 12:48:04 PM EST
    All this bankruptcy reform talk puts him between a rock and a hard place, no?  (And, hence, the ticket...?)

    The best way to judge legislation (5.00 / 2) (#14)
    by Jake Left on Tue Sep 23, 2008 at 01:20:48 PM EST
    is whether the lobby likes it or not. If the banking and wall street types favor it, it is a bad idea. If they spend millions trying to defeat it, then it is just what we need.

    My dad was a banker for several years, but he was also a yellow dog, liberal, union man. When the Texas lege was trying to repeal the state's homestead laws at the urging of the banking lobby, he told everyone he knew that you should always know that the banks don't want what is best for you; it is not what they do. Same applies to pharma, insurance, energy, or any corporate entity.

    This is not the socialization of capital (5.00 / 1) (#23)
    by Stellaaa on Tue Sep 23, 2008 at 01:43:24 PM EST
    these guys want all out the privatization of the Treasury and the US Government.  

    Another slogan (5.00 / 1) (#44)
    by Lengyel on Tue Sep 23, 2008 at 03:39:26 PM EST
    The consumer is too big to fail.

    Who do the bankers think they are? (none / 0) (#3)
    by rooge04 on Tue Sep 23, 2008 at 12:46:24 PM EST
    My goodness.  They're lucky we don't socialize banking completely with how badly they've messed up.

    you have to ask? (5.00 / 1) (#32)
    by wystler on Tue Sep 23, 2008 at 02:27:32 PM EST
    (with tongue planted firmly in cheek)

    simple, really. most bankers think they're republicans.


    The old saying.... (none / 0) (#6)
    by kdog on Tue Sep 23, 2008 at 12:53:00 PM EST
    "beggars can't be choosers" comes to mind.

    I'm not gonna like any kind of bailout, but whatever happens I hope the CEO salary cap being talked about is in effect for any nationalized/bailed-out corporation.  Failures cannot make 20 mill a year on the taxpayer...I'll fill out a new W-2 claiming 50 billion dependents if that's not in there...aka tax revolt.  

    Question. (none / 0) (#7)
    by LarryInNYC on Tue Sep 23, 2008 at 12:54:15 PM EST
    The suggestion here is that if future mortgages are subject to cram down during bankruptcy then mortgage rates for everyone will go up to cover the additional risk.

    Are the cram down provisions suggested by the Democrats limited only to distressed mortgages assumed by the government in the near future, or would it apply in perpetuity to all new mortgages issued from now on?

    If they really intend to allow cram downs on all future mortgages issued I imagine that that might well lead to increased mortgage rates in the future.

    I am not sure (none / 0) (#11)
    by Big Tent Democrat on Tue Sep 23, 2008 at 01:07:55 PM EST
    But cram downs are as old as bankruptcy law.

    They are? (none / 0) (#12)
    by LarryInNYC on Tue Sep 23, 2008 at 01:14:40 PM EST
    Then why do they have to be inserted into this legislation?  Or is the Admin demanding that the legislation reverse existing cram down provisions.

    And are you sure they're already allowed?  I was under the impression that they had to be negotiated between the parties.


    From what I understand (none / 0) (#17)
    by Steve M on Tue Sep 23, 2008 at 01:31:22 PM EST
    and bankruptcy isn't my area, the mortgage on your primary residence is outside the bankruptcy process and can't be touched, for better or for worse.

    Ironically enough, the mortgage on your second, third, and fourth homes can be restructured just like everything else subject to the bankruptcy process.  No idea if this is called the McCain Rule.

    I've probably got it quite wrong, but on the Internet you usually need to get something wrong for someone else to come along and correct it.


    The McCain rule. . . (none / 0) (#22)
    by LarryInNYC on Tue Sep 23, 2008 at 01:38:18 PM EST
    only applies to houses six through eight.

    To be fair, the Obama rule (none / 0) (#53)
    by ruffian on Tue Sep 23, 2008 at 05:20:10 PM EST
    only applies to houses he can buy himself without help from his friends.

    or the help of parents? (none / 0) (#56)
    by of1000Kings on Tue Sep 23, 2008 at 05:38:11 PM EST
    with the down payment? eh?

    or a friend who works at the bank?

    naw, that stuff doesn't happen in America...there is no favoritism/nepotism in our society...

    obviously I see the difference considering that Obama is a politician, but we just need to decide whether or not politicians are allowed to be normal human/Americans or not...

    because I'm sure what he did happens quite often in the normal nepotistic culture we have...just look at Palin and her cronies she put in office...(see, we can all do it and get nowhere)


    I'm not a bankruptcy lawyer (none / 0) (#18)
    by litigatormom on Tue Sep 23, 2008 at 01:34:19 PM EST
    but mortgage lenders, as secured creditors, aren't usually subject to a cram down. They have to get paid first, before anyone else gets anything. If they are "impaired" -- the property securing the loan is worth less than the principal and interest owed -- then the other creditors are out of luck. Cram downs typically occur when senior unsecured creditors are forced to accept less money because all other classes of creditors have approved a plan.

    As I understand the bill, the bankruptcy judge gets the power to force a particular class of secured creditor -- the mortgage lender -- to accept less than the full value of the principal and interest outstanding in lieu of foreclosing on the property. In that circumstance, there is no reason for the bank to foreclose because they can't use the property to make up any deficiency between what the debtor can pay and the balance of the loan.

    I haven't studied the bill closely, so I could be reading it wrong.


    Secured creduitors get crammed down too (none / 0) (#24)
    by Big Tent Democrat on Tue Sep 23, 2008 at 01:46:54 PM EST
    or did.

    I think litigatormom has it right (none / 0) (#29)
    by scribe on Tue Sep 23, 2008 at 02:07:22 PM EST
    on the cram-down issue.

    The point is, to borrow a phrase, "primary residences are different".  Thus, the Bankruptcy Code had, for years, incorporated state homestead laws in determining what a debtor could, or could not, keep.

    The same, analogously, seems to be the idea behind cramming down the mortgages.


    In addiiton (5.00 / 1) (#31)
    by Big Tent Democrat on Tue Sep 23, 2008 at 02:16:54 PM EST
    Rengotiating the payment terms of the secured debt is not, strictly speaking, a cram down. It is a refinancing.

    I disagree (none / 0) (#30)
    by Big Tent Democrat on Tue Sep 23, 2008 at 02:16:15 PM EST
    If the value of the secured property is below the value of the secured debt, the value of the asset will be used to discharge the secured debt.

    Ergo, you loan me $150,000 for a house. The house is worth $100,000 now. The secured debt gets reduced to the value of the asset and the debt is discharged.

    This happened all the time under the old bankruptcy law. I have no idea if that is no longer possible.

    As for the homestead exemption, as you say, that was a matter of state law mostly. I especially remember Bowie Kuhn buyng a 10 million dollar house in Florida prior to the bankruptcy of his law firm and invoking the Florida homestead exemption.


    Homestead Exemptions Protect Principal (none / 0) (#33)
    by santarita on Tue Sep 23, 2008 at 02:29:24 PM EST
    residences from liquidation to pay unsecured debts.  They do not protect against creditors that have security on the home.  

    Principal reductions and interest rate write - downs for ordinary debtors have been limited by both the Supreme Court and the 2005 bankruptcy bill.  But it's been a long time since I've had to deal with  consumer bankruptcies.  

    I'd look to the old Chapter 12 for guidance on how to balance the interests of consumers and lenders.


    Bingo (none / 0) (#25)
    by Lou Grinzo on Tue Sep 23, 2008 at 01:55:08 PM EST
    This is one of those knock-on effects that so few people pick up on.

    If you do something to make the production of some good or service more expensive, then the suppliers will raise their prices ("pass along the increase to the customer") and/or restrict the supply to just that portion that is still acceptably profitable.

    When we're dealing with such a huge and complicated mess, it's critical that we examine those knock-on effects as well as the more obvious, immediate effects.  Too bad that simple lesson is lost on so many of our elected and non-elected government officials.


    but doesn't something seem wrong (none / 0) (#26)
    by of1000Kings on Tue Sep 23, 2008 at 01:57:42 PM EST
    with it in this particular case, just morally...

    'hey, we know that we'd be in the crapper if it wasn't for the American people bailing us out, but that doesn't mean it's not still business as usual, you know, the business as usual that got us into this mess in the first place, ya, that's not going to change at all.  Thanks for the money, now my $20M home won't be foreclose on...


    The thing is (none / 0) (#27)
    by Steve M on Tue Sep 23, 2008 at 02:01:26 PM EST
    that sort of thinking is too often used as an excuse as to why we can never, ever do anything punitive to corporations, because they'll just pass it on.  In the real world it's often not that simple.

    For example, not to dredge up the infamous gas tax holiday proposal again, but "everyone" knew that it was a dumb idea because the oil companies would just raise their prices to compensate.  Except that in reality, you often see corporations choosing to absorb a one-time charge rather than pass it on and risk losing market share to competitors who choose not to pass it on.

    In this case, we're hearing an argument that homeowners can't possibly be given a break on their mortgages because it will make things more expensive for other homeowners.  Well, maybe so, but we should be initially skeptical of arguments that try to pit us against one another.  After all, couldn't this same argument be used to justify elimination of the bankruptcy process altogether?  Any time we relieve a consumer of a debt, other consumers will have to make up the difference, right?  


    I'm not excited to bail out (none / 0) (#34)
    by Militarytracy on Tue Sep 23, 2008 at 02:32:52 PM EST
    people who refused to think for themselves but I'm not excited to watch everyone around me totally tank either.  There must be a happy medium where some risks are found worth taking and mortgages being refinanced.  If my house is worth less though now I should be able to also refinance it if I would choose to even though I can afford my current payment.

    The lobbyists know how to push the buttons... (none / 0) (#10)
    by alexei on Tue Sep 23, 2008 at 01:07:53 PM EST
    and provide cover for Dems to cave to the demands.  Bush is a totally unpopular and lame duck President.  The Democrats shouldn't even be worried about what that discredited "administration" proposes, but should be crafting their own plan (oh where is Obama?) to salvage what can be salvaged on Wall Street, but, place most of the relief to Main Street.  There are excellent frameworks including Clinton's to make that legislation and it could be done quickly.  Like Clinton said "stop trying to only save the babies when they are already in the water, prevent the babies from falling into the water in the first place".

    Stop reacting to the Bush's "trickle down" economic thievery and act like real Democrats by helping 98% of the Country and propose real reform and relief and not just marginal.  Immediate five year freeze of foreclosures and immediate restructuring of loans to allow homeowners to keep paying those mortgages.  Institute the HOLC, pass Conyers health care bill, give immediate and large infusements to alternative energy to create new and high paying jobs, monies to states to help their citizens with heating and food, get rid of the bankruptcy bill and many more.  This is a bottom up economic "bail out" plan footed by us taxpayers that could actually save our butts from the Depression.  The gap between the super wealthy and the rest of us is unsustainable - the middle class is close to extinction - get real - who can buy anything if everyone but a very few have no money?

    The answer to your (none / 0) (#13)
    by oldpro on Tue Sep 23, 2008 at 01:20:27 PM EST
    final question is the issue at hand: credit...the ability to borrow is what's at stake.

    I'm having a hard time buying it.... (none / 0) (#16)
    by kdog on Tue Sep 23, 2008 at 01:31:19 PM EST
    All that the banking industry has to offer is credit...that's their only product.  If they wanna keep leeching off the producers and workers of the world they have to lend money.  If they don't have any to lend, they should go out of business, I have little doubt new avenues will open to offer credit for a fee....plenty of obscenely rich people out there who will lend out a million to get back 1.1, if the borrower has a sound business model.  And if they don't they shouldn't get a loan.

    ehhh, with less credit then (none / 0) (#19)
    by of1000Kings on Tue Sep 23, 2008 at 01:34:29 PM EST
    the price of everything goes down...

    obviously house values continue to go down, too...

    credit was just invented so rich people could make money off having money...yay...

    obviously the worst part of a credit crunch would be felt by entrepreneurs, and I happen to be in that group...

    maybe not though, maybe if rich people couldn't make money off just having money maybe they would be more interested in using private capital to make money with new businesses...

    ehhh, there's just too much going on...so lets continue the status quo and watch the gap between the rich and the poor become larger...

    at least now we won't have to bail out those crappy car companies when they come with their hands out...there won't be any money...


    Good answer to the non answer to my... (none / 0) (#48)
    by alexei on Tue Sep 23, 2008 at 04:04:54 PM EST
    rhetorical question.  There is no way that the economy can be saved if the gap between the super wealthy and the rest of us (not just the poor) is allowed to continue and grow.

    I hope the Democrats faxes are smoking, their (none / 0) (#28)
    by thereyougo on Tue Sep 23, 2008 at 02:04:34 PM EST
    phone lines clogged. I'm sure the general public is not taking this lightly and probably haven't gotten full speed on whats really going on. Afterall most Americans now have to have 2 jobs to make ends meet considering the price of everything these days .

    If the Democrats cave yet again, I'm really going to consider being an ex-patriot.

    This is beyond the pale.

    Theee worrrst administration in modern history.

    If this doesn't put this admin (none / 0) (#36)
    by Jlvngstn on Tue Sep 23, 2008 at 03:00:55 PM EST
    as the worst in modern history, nothing will.

    Why trust the people ... (none / 0) (#37)
    by Robot Porter on Tue Sep 23, 2008 at 03:06:33 PM EST
    that got us in this mess?

    That seems to be question at the root of all this.

    Krugman points to the lie (none / 0) (#38)
    by Stellaaa on Tue Sep 23, 2008 at 03:17:25 PM EST
    Today Paulson said this, Krugman caught this lie as well, I almost fell off my chair
    We gave you a simple, three-page legislative outline and I thought it would have been presumptuous for us on that outline to come up with an oversight mechanism. That's the role of Congress, that's something we're going to work on together. So if any of you felt that I didn't believe that we needed oversight: I believe we need oversight. We need oversight.

    But the three page document had Section 8, which excluded oversight openly.  

    Sec. 8. Review.

    Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

    More lies to compound (none / 0) (#39)
    by themomcat on Tue Sep 23, 2008 at 03:25:18 PM EST
    this "felony". This from WH spokesperson Fratto:

    Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.

    This was from an article in RollCall from this AM.


    Paulson badly miscalculated on this ... (none / 0) (#41)
    by Robot Porter on Tue Sep 23, 2008 at 03:30:41 PM EST
    the public has no stomach for these games anymore.

    The reign of King Henry will be brief.


    Private sector (none / 0) (#43)
    by Stellaaa on Tue Sep 23, 2008 at 03:38:31 PM EST
    These guys have no idea how to get consensus and how to do anything right.  Cheney jack boot public policy is leaking through this.  

    C'mon, Stellaaa (none / 0) (#50)
    by gyrfalcon on Tue Sep 23, 2008 at 04:59:01 PM EST
    Paulson asked for what he'd like if he could have what he felt he needed but from the very beginning has been more than willing to consider modifications. What he'd like best is no oversight that could hamper his actions where decisions will have to be made in an incredibly volatile and fast-moving situation.  He's also got to hire people and firms to carry this out, and I dunno about you, but I wouldn't volunteer if I thought I was likely to be assaulted by gazillions of after-the-fact lawsuits.

    So he spelled out what he wanted and went to Congress to ask them to give him as much of it as they could, and that's what they're trying to do.

    I've said this before and I'll say it again.  Hank Paulson is not Dick Cheney and he's not George Bush, and it's wrong-headed to act as if he were.

    Paulson's proposal is just that, a proposal.


    So, why (none / 0) (#54)
    by Stellaaa on Tue Sep 23, 2008 at 05:22:41 PM EST
    does he specifically say : no oversight, then say, he did not mean that he did not want oversight.  

    Paulson is wrongheaded cause he listened to the Cheney Bush approach:  ram it down their throat, he does not think that in a Democracy, we the citizens have a place, he, the smart one, the neocon, knows better and we have to shut up.  It's the style of governing.  


    That's simply not right, Stellaa (none / 0) (#59)
    by gyrfalcon on Tue Sep 23, 2008 at 06:17:19 PM EST
    and you will go way astray if you try to force this into the previous Bush admin pattern.  I'm quite certain the lawyers wanted that provision, for one thing, but it's been clear from the start that Paulson wasn't even going to try to insist on it.

    He has rammed nothing down anybody's throat, and you won't find any of the Dems. on the House and Senate banking committee who would say he has or even has tried to.

    I know you, Stellaa, and we've agreed on almost everything over the last X months.  You're not that naive.  The brief proposal Paulson sent to Congress was a starting point where he laid out what he'd like to have, if he could get it, knowing perfectly well, because he's no fool, that he wouldn't get everything he was asking for.

    He's also not a neocon.  "Neocon" is not an epithet that one throws simply at someone one doesn't like, it's a specific philosophy revolving around foreign policy, not banking and credit.

    If you want to be mad, be mad at both the administration, who did nothing while all this was developing (and btw, my understanding is that Paulson has been vehemently arguing about the need to get in there and put in some regulations since he got in in 2006 and has been on the losing end of the argument until this crisis), and you can also be mad at the Congress, particularly the Banking Committees.

    I just heard Jon Tester whining on Hardball that "Bush never told them" there was a developing problem in the financial sector.  Either he's dumb as a rock or he's full of you know what.  If he'd been doing his job, he wouldn't have to have the Bushies tell him what was going on.  The information was clearly out there that this was building, it wasn't a secret, and the Dems on the Banking Committee, as usual, didn't do their jobs.

    And by the way, never mind the banking lobbyists.  It should make everybody left of Godzilla stop and question their judgment when they find themselves on the same side as Richard Shelby, IMHO.


    It's still the Bush administration (none / 0) (#61)
    by Stellaaa on Tue Sep 23, 2008 at 06:59:17 PM EST
    It's not like you to take the position (none / 0) (#62)
    by gyrfalcon on Tue Sep 23, 2008 at 08:36:45 PM EST
    "My mind is made up, don't confuse me with the facts."

    How about "Even a stopped clock is right twice a day"?


    I think I figured it out (none / 0) (#40)
    by Steve M on Tue Sep 23, 2008 at 03:27:23 PM EST
    Here's the part we know already: The reason for the short-term crisis relates to mark-to-market accounting, which is to say, companies are required to value securities at the price they would currently fetch on the market.  These mortgage-backed securities used to trade regularly between financial institutions, but all of a sudden (due to the credit crunch) they're not, meaning the liquid market has suddenly vanished.  So if you revalue all these securities at the price they would currently fetch, their value as an asset goes way down, and suddenly your balance sheet is a huge mess.

    Earlier today I suggested that the government could use the $700 billion to subsidize the market-making process, meaning they would create liquidity by providing capital to market makers.  The basic problem with my concept is that, because of the sheer volume of impaired securities out there, the choices are: (1) make the market entirely by use of government funds, which means the market-makers can take crazy risks since they don't have any of their own skin in the game; or (2) require the market-makers to use their own capital and then have the government bolster that capital by providing "matching funds," with the problem that there's simply not enough private investment capital out there right now to make any sort of difference.

    But Krugman spotted something during this morning's hearings that may indicate how the Feds expect this to work.

    BERNANKE: I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.

    First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down ...

    In other words, what will happen is that the government will use its capital to facilitate the creation of a market for a relatively small amount of the distressed securities that are out there.  With the help of the government greasing the wheels, the securities will be bought up at a pretty good price, much more than they would be valued if they had to be marked to market right now in the absence of a liquid market.

    At that point, here's where the accounting miracle occurs.  Even though only a small percentage of the distressed securities have actually changed hands, a market price has effectively been set for the entire class of securities - even though, in reality, the liquidity crisis would continue but for the government supplying the grease.  Which means that all the financial institutions which continue to hold distressed securities get to mark them to market at the NEW government-enabled market-price - magically making their balance sheets much healthier!

    I realize this explanation is probably pretty confusing for some people.  But if it sounds like a bunch of smoke and mirrors to you - you might be right.  If this is really what the government has in the works then it's a pretty amazing concept.

    It's deeper than that ... (none / 0) (#42)
    by Robot Porter on Tue Sep 23, 2008 at 03:36:20 PM EST
    the notion that financial services can prop up an economy with a weak manufacturing base and limited middle class capital is dead.

    It died last week.

    This was the religion of financial sector.  It will take awhile for them to realize their religion was a fraud.  But it was.

    And once again, on issues of capitalism, those of us on the loony left have been proven right.  And if this economy is fixable, we're going to be the ones who have to fix it.


    I think you nailed it... (none / 0) (#49)
    by santarita on Tue Sep 23, 2008 at 04:17:38 PM EST
    I think their theory is that this would be a cheap fix.  And it could work but it is a little bit like Dorothy clicking her ruby shoes together, saying that she want to go home and hoping for magic.  If Wall Street believes enough it will work.  And if it doesn't work, well  the new Treas. Secretary has to deal with it.

    Sounds like a con game to me (none / 0) (#51)
    by ruffian on Tue Sep 23, 2008 at 05:10:11 PM EST
    But you write so articulately about it that I will believe it is an accounting miracle.

    I will restate my 1% doctrine on Bush Administration perfidy, which explains my cynicism:

    If there is as much as a 1% chance that what they want to say is true, they will state it as a fact, more often than not a bald faced lie.

    Therefore, since they really really want to reassure us and say that the securities are underpriced, but will not state it as a fact, I believe they know for a fact (with less than 1% doubt) that the securities are actually overpriced.

    But hey, it is up to our creditors in China and Japan if they want to finance this risk.  Has anyone asked them yet ?


    Bingo, SteveM (none / 0) (#52)
    by gyrfalcon on Tue Sep 23, 2008 at 05:12:18 PM EST
    That's exactly the plan as I understand it, at any rate.

    Except for one thing, which is that my understanding is that a large number of these mortgage-backed securities are based on haphazard bundles of good and bad-risk mortgages, and with the fall of the housing market, etc., there's simply no way to put any kind of actual value on them.  There's no market for them, as I understand it, because nobody can put a value on them.

    So the government will establish some kind of de facto value by buying up a bunch of the worst ones and clearing out the real junk, the so-called "toxic waste," from the system as much as possible.  From there, the institutions that were holding them get a bit of infusion of cash but now will have to rely on their actual assets and balance sheets to go forward.

    The ones that have that will survive.  The ones that were way over-leveraged and loaded with this junk will probably not.

    Paulson seems to have looked deep into the system to see what the pressure points are and his proposal addresses those pressure points and allows the resulting more honest market to do the rest.

    It's not going to prevent a recession and it's not going to help out the little guy directly, but if it works, it will forestall the looming meltdown that could take all of us under, fat cat and little guy alike, by precisely targeting the cause of it.

    It also holds out the strong likelihood that the Treasury will eventually get a good chunk of that money back over the course of the next couple years.

    It's really pretty ingeneous, and I hope it passes quickly with some or all of the Dodd modifications/additions.

    I also think both McCain and Obama should promise right now to keep Paulson on as Treas. sec. if they win.


    Paulson is hoping that the first few... (none / 0) (#60)
    by santarita on Tue Sep 23, 2008 at 06:34:51 PM EST
    tranches that they evaluate, purchase at a reverse auction and then resell will create the basis for the market valuing them at an other than fire sale price.  He's got a lot of faith in the market, doesn't he?

    Heh. Sure does (none / 0) (#63)
    by gyrfalcon on Tue Sep 23, 2008 at 08:39:00 PM EST
    But man, if you're trying to stave off a market/financial system collapse, best have a guy who knows how both of them think inside out in charge, no?

    I honestly can't see any flaw in his reasoning on that, nor have I heard any substantive criticism of it.


    This is basic throwing funny money at (none / 0) (#45)
    by Stellaaa on Tue Sep 23, 2008 at 03:44:13 PM EST
    bad money.  Great public and economic policy.  

    And it's obvious ... (none / 0) (#47)
    by Robot Porter on Tue Sep 23, 2008 at 03:56:57 PM EST
    and the public isn't buying it.

    Yesterday according to Ras support for the Paulson plan was at 28%.  It's supposedly worse today, but the numbers seem only available to premium members.


    Dodd is in the minority (none / 0) (#55)
    by Slado on Tue Sep 23, 2008 at 05:29:35 PM EST
    Dodd is opposing it because it's not agreesive enough.

    Most are against it beause they want to see what will really happen if we don't act.  Not because we don't think this bill does enough as Dodd (Mr. Fannie Mae) does.


    Economists: Oppose... (none / 0) (#57)
    by Stellaaa on Tue Sep 23, 2008 at 05:53:56 PM EST
    Economists who oppose plan
    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.

    1. 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.

    2. Its long-term effects.  If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, Americas 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.