EVERYTHING ABOUT THIS SO-CALLED BAILOUT—WHICH SHOULD NOT HAVE BEEN SO-CALLED WAS POORLY HANDLED FROM THE BEGINNING
THIS IS NOT A BAIL OUT; IT IS A CREDIT ADVANCEMENT WHICH WILL BE REPAID TO THE TREASURY AND THUS THE PEOPLE ONCE THE REAL ESTATE MARKET IS REVIVED.
Secretary of the Treasury, Henry Paulson or whoever it is that labeled this a “bailout,” have muddled this entire political process.
First of all, what the Secretary is proposing is not a bailout, it is a loan collateralized by foreclosed mortgages.
The Treasury will hold the mortgages until such a time as the real estate market recovers from its present malady. When the demand for mortgages increases to their normal level, the Treasury will begin to market (i.e. sell) the mortgages in the open marketplace.
It is possible that the $700 billion will not be returned to the U. S. Treasury, on the other hand, it also possible that the sale of these bundled mortgages will return a profit as was the case in the Savings and Loan scandal in which five Senators including Senator John S. McCain (R-AZ) were involved.
It is also possible that we will not recover all of the $700 billion. The key is that if the course of action is carried out when the real estate market improves, some or all of the money will flow back into the U. S. treasury.
To that end, Paulson handed Congress a two and a half page “bill” which gives the Secretary “autocratic authority” over the execution of the credit advance. The words he used to outline his plan and the authority he stated in the bill he requires to execute the plan, were frightening to many, absurd to most, but politically insane to the vast majority on both sides of the aisle:
“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.”
In other words, Paulson was asking for absolute power over the execution of the entire credit advance. His decisions could not be “reviewed” even by a court or a government agency.
Paulson started out on the wrong foot in his approach to Congress and someone made the fatal mistake of labeling this action as a bailout which in most people’s minds implies that the government is holding all of the corporations involved free of any responsibility or payback.
The truth is that the Secretary of the Treasury will hold all of the mortgages included in the package and as the real estate market comes back (if it does) the mortgages will be sold and the resulting funds will be returned to the U. S. coffers.
The Congressional leaders on both sides wanted supervision. They got it. Everyone agreed that a non-partisan board would oversee the Treasury’s conduct in the management and resale of the mortgages. They got it.
They wanted a salary cap placed on the key officers of the companies included in the credit advance. They got it.
As I mentioned in a posting a few days ago several of the CEO’s of these failed companies were leaving their posts with multi-million dollar retirement compensation packages and stock options as seen below:
· Richard Fuld, chairman of the board of Lehman Brothers Holdings, Inc. was rewarded with $22 million in retirement compensation after the company filed for bankruptcy.
· Daniel Mudd of Fannie Mae and Richard Syron of Freddie Mac, are scheduled to receive retirement packages that total $25 million. In this case, their package is in limbo after an outcry by the public and then the Congress.
· Stanley O’Neal, the ex-chairman and chief executive of Merrill Lynch & Co. departed the company last year with a $161 million dollar retirement wrap up.
· Angelo Mozilo, the founder and former Chief Executive Officer of Countrywide Financial Corp., received compensation of $1.9 million and sold $121 million in stock in 2007 even though the company was report billion dollar losses because of defaults in subprime loans.
Because the Paulson recommendation was so poorly explained to the public, rumor has it that public opinion was running 300 to 1 against passage.
As usual, Congresspersons were fleeing responsibility for this vote like a herd of gazelles from an angry lion.
With the election only weeks away, many conservatives were philosophically opposed and those in districts with tough and very competitive campaigns under way were all fighting the measure.
However, some went so far as to call this proposal “socialistic,” The government was not attempting to take over the entire real estate or investment industries and run them under government control as in a Socialist state. Paulson was proposing a temporary government intervention that would prevent banks, large investment banking corporations and the credit markets from completely melting down into failure
Many Congresspersons were distressed that the government was going to aid big money institutions, while doing nothing for the middle class or the little man who is jobless, losing his home and on the verge of disaster.
I believe it is possible for this latter concern to be addressed in the final bill. It is probable that the Congress will provide for a refinancing of the real estate sub-prime loans that will reduce the monthly payments and make it possible for those who fell into this fatal trap a way to keep their homes and earn their way out of financial danger.
Those banks and investment banking houses that were aggressively promoting these sub-prime loans believed the housing market was going to increase in value ad infinitum nausea and while the mortgage payments remained low and affordable for a time, the mortgagee would be able to afford the higher payments as a higher interest rate went into affect.
Unfortunately, the real estate market bubble burst, the mortgagees faced serious problems with an upsurge in lay offs, absurdly high medical bills, ever increasing college tuition costs, exploding gasoline costs and the general cost of living increase in everything from groceries to blue jeans.
Over the week-end an agreement had been reached between the Democratic and Republican leaders in Congress that each party would convince fifty percent of their party’s membership to vote for the bill and thus both parties could share the blame with the election coming up in a matter of weeks.
The Democrats exceeded the fifty percent mark, but the Republicans fell dramatically short.
The Republican Minority Leader, John Boehner blames Speaker of the House Nancy Pelosi for the bill’s failure because she came to the House Floor and delivered a very partisan speech about the causes of this financial quagmire. The Speaker laid this entire problem at the feet of George W. Bush. His administration permitted these brokerage firms to pay their CEO totally out of line compensation packages. His administration did not provide any form of oversight of the banking and brokerage industries. Deregulation, according to Pelosi, was elephant in the room.
There is no doubt that all of the elements she mentioned contributed to the crisis. However, a leader does not deliver such an indictment on the very day you are asking the cooperation of the very party you are demonizing. There is plenty of time to lay out the blame for this catastrophe. What she did was badly timed and while it was not the cause for the failure of the passage, she allowed Boehner to place the blame on her shoulders. Politically, she was incorrect.
It is well to remember that it was John McCain and his chief economic advisor, Phil Gramm who spearheaded the move to totally deregulate Wall Street when the Republicans controlled Congress. Until recently, it was McCain’s plan to further deregulate banks and Wall Street has part of his economic plan should he become president. I think he may well reconsider his plan.
It is my belief that the Democrats will take ownership of this bill, rewrite it to include individual foreclosures and bankruptcies and pass it as a band-aid for an appreciably larger economic wound. While it will not take us out of the woods, it will give us some room to unfreeze credit, put some money into circulation and to crawl back to safety.
I just got off the phone with my broker at Wachovia. While the bank is being taken over by CitiCorp, the brokerage business will remain independent.
My portfolio is highly diversified; we have still lost about 7% of the portfolio’s value during this downturn. My broker believes that the market will rebound to 11,000 if and once the credit advancement bill is passed. He mentioned that Libor went up 4 points which means that “the bank” is not interested in loaning to banks until this mess is figured out. This is further proof of just how tight credit is.
If the Congress passes a “bailout” on Thursday, October 2, 2008, following the Jewish Holiday with or without Republican involvement, the market could, indeed, hit 11,000 which seems to him (my broker) to be the point where the markets will become active again and business will begin to get back on track for the time being.
There are a couple of hundred other banks that are on the verge of bankruptcy. The bailout, perhaps, can prevent that eventuality.
I am convinced that too many ultra-conservatives do not perceive the depth of this problem or they would not be holding up passage of the legislation Congress must pass sooner or later. This is the price the country must pay for the dreadful mismanagement of the entire economy in the Bush administration with the aid and support of John S. McCain, Republican candidate for president. I warned you Republican die-hards that this man would screw up and you would not listen. Not once but twice you returned this administration to power at the cost of trillions of dollars. Maybe the next time you will vote for someone who is competent and not someone with whom you would want to have a beer or you would vote for talent and only experience.
Should he (McCain) be elected (God forbid) and Gramm is appointed Secretary of the Treasury, I am putting everything I own into Treasury Bills.
2:14:44 PM 
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