The Bailout Plan

What the hell?! What do those provisions have with the current bill? Well, it's as the 17-year Wall St. veteran said today...when you see a bill bound for passage, you just throw a bunch of baggage on it that gets passed through anyway.

This is kind of inside baseball, but the reason those extra provisions are attached to the Senate bill is because of some parliamentary procedural issues. The Constitution states that only the House of Representatives may initiate appopriation bills, so the only way that the Senate can vote on such a bill before the House does (as it must in this case, because of the House voting nay on Monday) is to attach the bill to some other bill that the House has previously approved. With the exception of the raising of the FDIC limits, none of these new provisions were actually new provisions. Yes, in fairness, none of them are in any way connected to the bailout/rescue/whatever-we're-supposed-to-call-it-today bill, but attaching the b/r/w bill to the already-approved earmark-laden spending bill was the only Constitutionally-legal way for the Senate to take the lead. The only other option was for the Senate to do squat and wait for the House to get its act together.

Sanket Patel

i do stuff
LOL at the chart, but it brings about some redonculous matchups...Mitsubishi or MS vs. Barclay's? What? JP morgan absorbing any more banks, or uh, beating out the president in something?

How are BRK and GS matched against each other? BRK is definitely not buying out GS, and GS has no need for BRK.

Fed vs. Wells Fargo? Wha? BRK or GS vs. Citi? o_O?

Funny, yes, but completely nonsensical once you try to make sense of it.

doug reich

Some guy
BRK bought $3B in preferred from GS, so there's a sensible match up there.

Barclay's bought Lehman; MS was going to get funding from Mitsubishi UFJ

Will Fed broker an arrangement to save Wells Fargo?

I agree a lot of them are one-sided, but this isn't actual basketball...
Went to Citi Bank branch around Rockefeller Center yesterday, and saw a huge sign at the entrance: "We are taking Wachovia accounts business.......". I thought it's a done deal already. For $15.1 B Wachovia jumped into the bed of Wells Fargo over night! At opening bell, Citi dropped and Wachovia surged. Maybe Citi can consider Wells Fargo as a whole to intrude the west coast market? :)

Citigroup was "upset" of course, here is the quote from WSJ today:

Wachovia’s agreement to a transaction with Wells Fargo is in clear
breach of an Exclusivity Agreement between Citi and Wachovia. In
addition, Wells Fargo’s conduct constitutes tortious interference with
the Exclusivity Agreement.
The Exclusivity Agreement provides, among other things, that Wachovia
will not enter into any transaction with any party other than Citi, and
will not participate in any discussions or negotiations with any third
party. The Exclusivity Agreement also provides that the parties would
be irreparably harmed by any breach of the agreement and that the remedy
of specific performance of the agreement is appropriate.
Citi was negotiating in good faith and nearly completed the definitive
agreements required to consummate the Citi/Wachovia transaction that was
announced on Monday. The value of the Citi agreement to Wachovia
shareholders was substantially in excess of Wachovia’s closing price on
Thursday, October 2nd. Citi has also been providing liquidity support
to Wachovia Bank since Monday’s announcement.
Citi has demanded that Wachovia and Wells Fargo terminate and not
proceed with any proposed transaction, any conduct in furtherance
thereof, or any other act in violation of the Exclusivity Agreement.
Citi has substantial legal rights regarding Wachovia and this
With or without this transaction, Citi maintains an unmatched, globally
dominant franchise with strong liquidity, total deposits exceeding $800
billion and a Tier 1 capital ratio of 8.7% as of the second quarter.


Faculty (Undercover)
Whee! I can see my tax dollars working already!
Government Made the Mess

A lie told often enough becomes the truth.
-- Vladimir Ilyich Lenin

What if someone were to tell you that our government, without any oversight, was going to spend hundreds of billions of dollars of taxpayer money to buy near worthless items on eBay at whatever price they believe is appropriate, using the justification that it will stimulate the economy?

I believe this would seem pretty ridiculous to most people. Yet, the government's current plan of buying extremely hard-to-value toxic assets is remarkably similar to the eBay example. Here's why.

Although bankers and politicians swear that the financial markets will be saved and credit markets stabilized by this plan, no hard evidence really exists to support their claim. They are really saying "just trust us" like a used car salesman trying to explain why you don't need a warranty on a 1977 Ford Pinto. Whenever I hear that phrase, especially from politicians, I reach for my wallet.

The bankers and politicians say that "smart" people like Hank Paulson and Ben Bernanke will protect the taxpayers' money and, if we don't spend this money buying troubled bank assets, the stock market will crash, credit markets will freeze, and we will enter a second Great Depression.

Of course, Paulson and Bernanke are the same geniuses who got us into this mess in the first place, but now they are somehow the most qualified to get us out of it. That doesn't make any sense to me.

As for the stock market crash fear, it crashed in 1974 and 1987, and there was not any Great Depression afterward in either case. As for credit markets, they're already frozen exactly because of the actions promoted by Paulson and Bernanke for the last year. Their inconsistent and often unexplained meddling with the markets has created a hostile business environment. In this highly uncertain environment caused by government meddling, market players are understandably afraid to do anything.

Here are just a few examples of unexplained and inconsistent government actions in the past year. Why did Bernanke and Paulson save Bear Stearns and commit public funds but allow Lehman to die in bankruptcy with no help at all? Why did Paulson nationalize Fannie and Freddie and wipe out their shareholders but then allow investors to keep some equity and stay privately owned and publicly traded?

Why did the bailout or rescue, depending on your point of view, only come up when it looked as though Goldman Sachs, Paulson's former employer, was going to fail? Why did the government orchestrate the forced shut down of Washington Mutual and Wachovia, yet many other banks with similar problems such as Citigroup, Corus, Downey and National City, have been spared or even protected? None of this has ever really been explained. When pressed, they go back to stock phrases, referring to "systemic risk" that really mean one thing: "We are smarter than you, and you have to just trust us."

Bankers and politicians say that the government needs to save the $62 trillion credit default swap market from collapse, but how can $700 billion fix a broken market that is nearly 90 times the size of that amount of money? The total derivatives market, which is the real source of the turmoil in credit markets, is $1,400 trillion.

That is 200 times the size of this $700 billion rescue plan. If either the credit default swaps market, which involves companies placing bets on and insuring risk against the likelihood of default on different types of bonds, or the derivatives market is really broken and going to collapse, this relatively small amount of money will not stop that process from happening.

The most recent and most disturbing proposal that is being promoted by lenders and politicians is an attempt to abolish fair value accounting. What this means is that lenders do not need to mark their assets to what those assets could be sold for in the market. Both regulators and auditors oppose this plan to eliminate, or water down, fair value accounting.

Nevertheless, the banks and their political friends are asking investors and taxpayers to "just trust them" about the value of these assets on bank balance sheets. If it already weren't obvious, this is the most blatant attempt yet by the "fat cats" on Wall Street and in Washington to sucker investors and the taxpayer. It's also strikingly similar to what the Japanese banks pulled off after their bubble burst with government support, and we know how well that worked. It took Japan more than a decade to work through its banking crisis.

It failed miserably and probably made their problems a lot worse. Is that the outcome we want here? My view is that the further away we move form honest and transparent markets, the worse this crisis of confidence is going to get.

The bottom line is that socialism, even for rich and so called "smart" people, does not work. If socialism did work, we wouldn't need a market at all. We could just have really "smart" people tell us what to do, what to think, and what to pay for everything. Somehow Wall Street and Washington insiders believe that they can ignore this very basic concept and get away with it. Their arrogance and ignorance of basic economics seems to me a lot like the way Wile E. Coyote thinks he fly for a while after he runs off a cliff chasing the Road Runner.

I am sure that Paulson, Bernanke and other promoters of these rescue plans mean well. They believe that we need these extreme measures right now to avoid a meltdown, so I understand their position. But their plans will not stop a meltdown if the problems are really as bad they seem. Further, meltdowns, as painful as they are, are a necessary part of capitalism. They do not cause depressions. Depressions are caused by governments that prevent the market from correcting itself and therefore choke off economic activity. This is what happened during the 1930s in America. It was onerous regulation, tax hikes and the New Deal that prolonged the downturn. We are in this mess right now because of government meddling by Alan Greenspan, who kept interest rates artificially low for too long and inflated the credit bubble.

What would work to correct the financial system? First of all, we should emphasize transparency at all of these banks and other lenders. That means wiping out the equity, unsecured debt and senior management pay packages at insolvent companies. The government could then facilitate the absorption of this failed enterprise into a better capitalized and managed company such as JPMorgan Chase or Wells Fargo. Or, the government could provide new equity for the recapitalization of those companies and also replace management in those situations with more competent executives. This restructured entity would then have a recapitalized balance sheet and a new management team that would have some credibility with investors and market players.

Second, bank deposit insurance should be increased to at least $500,000, and similar insurance should be provided for money market accounts to avoid a possible run on the banking and money market system into Treasuries.
Third, the government and the Fed should inject liquidity into the corporate and municipal bond markets. Both of these markets have been frozen due to all of the fear and uncertainty in this environment, combined with the capital limitations of the banks that normally support these markets.

The government is already doing this for the mortgage market, so it would also just level the playing field and stop unfairly favoring mortgages. Any liquidity provided by the Fed for these operations would be short term and, if not repaid in full, would ultimately result in the equity of the entities that borrowed the money taking those losses first.

Fourth, create a transparent auction process for the toxic assets of lenders in public view and allow any investor in the world to bid on them. This means placing these toxic lender assets on the equivalent of eBay and getting the highest bid.

If the lenders don't like the highest bid, they don't have to sell. However, the government would then have a transparent market price by which they could evaluate these toxic assets. That would become the basis for determining if the bank is solvent or not and taking appropriate action as explained above.

I want to believe that we can work our way through these problems with a sensible and transparent process built on sound economic principles rather than a process built around secrecy, back-room deals, power grabs and fear. I hope we have learned something from history about the dangers of making policy decisions based on panic and a rush to judgment. Maybe I'm too much of an optimist. We'll see.
Christopher Grey

Sanket Patel

i do stuff
Paulson to name adviser to oversee U.S. bailout: report

PHILADELPHIA (Reuters) - Treasury Secretary Henry Paulson is expected to name Neel Kashkari to oversee the $700 billion program to buy distressed assets from financial institutions, The Wall Street Journal reported on Sunday.

Kashkari, a Treasury assistant secretary for international affairs and a former Goldman Sachs banker, is expected to be named interim head of Treasury's new Office of Financial Stability as early as Monday, the newspaper reported in its electronic edition.

Kashkari, who headed Goldman's information technology security investment banking practice in San Francisco before joining Treasury, has been advising Paulson on a variety of issues since his nomination in November 2007.
In his new position Kashkari would oversee Treasury's effort to buy bad loans and other distressed securities, the newspaper reported, citing unnamed people familiar with the matter. A Treasury spokesperson was not immediately available to comment.

It looks like Goldman Sachs will run the US financial system very soon...
Better than bumbling politicians, that's for sure!

Goldman Sachs knows how to do things right. Goldman Sachs doesn't screw around.

And I say this even though the odds are against me for finding work there.
Careers and Bailout Overview

A lot of talk had been going around about the entrance of socialism into the markets due to this bailout. I find it mostly empty talk - and when I ask someone to explain it to me in depth, I get evasive answers. Not that I am saying its wrong, just that I don't get it and nobody can explain it. I am hoping that maybe somebody here could. Nobody would hate it more than me to see the government sticking their ugly head where they don't belong.

I looked up articles on the bailout - and none of them are too clear, most of them repeating "government to buy up toxic assets" , "limits on executive compensation" (never say limited to what though), "money to be released in stages of $250B".

Anyhow - it seems like the behavior of one big hedge fund. Government has pooled money and now goes around buying up bad assets in hope of boosting confidence. Is that about right? I could see how anybody with capital would be hoarding it right now and not wanting to share it.

How does the bailout entail the entrance of socialism? How would this affect the salary of non-executives. A (future) investment banker entering a bulge-bracket firm as an analyst (40K-80K) could reasonable expect to be making $1M+ in 10-15 years. A bulge-bracket quant (programmer, statistician, etc.) could reasonably expect to be nearing $.5M/1M after putting in some good time and pursuing an MBA (and/or PhD).

Personally I am very unhappy with this bailout. $700B is just too much money. The senator down here in Georgia is now facing a tough re-election because he voted against the wish of Georgia residents (for the bailout). Now they are trying to justify it some by claiming that the toxic stocks may eventually go up - and they government may turn a profit. Everyone! Start buying up all the stocks Uncle Sam is. Yeah right.

Thanks in advance,
That's a funny way to put it. Anyhow, bashing the bailout wasn't my purpose. I was trying to find out more about it, but mentioned that I didn't like what I heard. Buying up hundreds of billions of dollars worth of toxic assets in hopes that this will boost market confidence doesn't even fill me with confidence. It sounds like mind games to me, and I prefer to think things on a quantitative, rather than a qualitative level (i.e. an increase of $700B into the financial markets will cycle with a predicted 5x magnifier effect, increase the circulation of money, and in conjunction with aggressive tax cuts and incentives, unfreeze the credit market and restore investment and lending levels to previous equilibriums not buying $700B of assets nobody in their right mind wants to touch will result in a divine revelation to those who have money that its lending time!) . I thought someone here could expand on it for me - and if I have misconceptions, correct them for me.


doug reich

Some guy
Read the primary documents. The website for congress will have the text of the bill.

The reason those articles are vague as you say, is because the bill is not very specific. It gives a lot of power to the treasury secretary to do as he pleases with a variety of tools.
A lot of talk had been going around about the entrance of socialism into the markets due to this bailout. I find it mostly empty talk - and when I ask someone to explain it to me in depth, I get evasive answers. Not that I am saying its wrong, just that I don't get it and nobody can explain it. I am hoping that maybe somebody here could. Nobody would hate it more than me to see the government sticking their ugly head where they don't belong.

How does the bailout entail the entrance of socialism?

It's abuse of language. The American state is in the hands of the rich. These rich -- who find their fortunes endangered -- are using the resources of the state (over which they have great influence) to secure themselves. Private debt has been transferred to the public sector, using threats of complete economic meltdown and the possibility of a fascist dictatorship (though to my mind such dictatorship would be less venal and corrupt and more accountable to the people). Thus, this bailout is "socialist" to the extent that costs have been "socialised" (i.e., have to be borne by the people as a whole) while the benefits accrue to a small and influential plutocracy. This travesty goes by the name of "American democracy," The tribunes of the people -- senators and congressmen -- who are supposed to safeguard the interests of the people are doing no such thing other than making some vague noises so as to placate their constituents.

The bailout is also being called "socialist" because it concentrates more power in the executive though methinks better words for this would be "authoritarian" or even "totalitarian." Indeed, if you examine the fascist movements of the 20th century, they arose from a crisis of capitalism, and the (hijacked) power of the state, masquerading as populism, was used to shore up endangered private interests.

What is now being done goes against every libertarian and democratic impulse still remaining in the USA. And for thirty years we have been fed pap about the miraculous self-correcting tendency of free markets and how they perform miracles (a la Milton Friedman and Ayn Rand). Yet when trouble arises, the state is asked to intervene. The free-market ideology has been nothing more than camouflage for a self-aggrandising financial elite with immense political influence.

I find articles by Paul Craig Roberts instructive. Here is one. And here is another.


Faculty (Undercover)
I know. I'm fully expecting Treasury to come out tomorrow and say that they're guaranteeing all debts by all listed US companies, at which point the Dow will go to 0 and Godzilla will emerge from the East River to eat Manhattan.

Anybody watching sovereign CDS on the US? Sort of interesting.

Sanket Patel

i do stuff which point the Dow will go to 0 and Godzilla will emerge from the East River to eat Manhattan.

Hahaha :iagree: