The proposed text of the law to bail out financial institutions is extraordinary to say the lease - the biggest blank check in world history is being written and given to a single person to share with his friends. Without review or recourse.
This is for $700 billion, at a time - the treasury can buy more crap if they manage to offload any after they max out.
The idea is that the US government will buy unsellable debt off select financial institutions, who will basically get US Treasury bonds in return.
The sale ought to be at some discount - which is the catch.
At current market, the institutions are insolvent, which is a problem.
So this only works if the government buys mortgage bonds and commercial bonds off institutions at a premium - the argument being that the future value of the bonds will be higher than current when conditions improve - that the current low value is a self-fulfilling prophecy.
But, if the premium is too high, the government, aka the US taxpayers, lose.
And there is no recourse, secondary compensation or equity to compensate.
The financial institutions made the high risk bets, took the profits and bonuses and now dump the risk on the taxpayers. At least the surviving institutions do, with no further penalty.
And here are the clinchers:
2.2 "...entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;"
8. "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."
Treasury Secretary can buy $700 billion of residential or commercial mortgage bonds on whatever terms he likes, with priority to stabilize the banking system, exempt from all laws and unreviewable.
But I am sure we can trust him.
For two years.
But something tells me the current Sec Treas would go on a little buying spree before christmas...
The ceiling on the national debt is raised to accommodate this, to a bit over $11 trillion.
Absolutely criminal, as currently written.
Calculated Risk has more discussion.
The financial system does have to be made liquid again, but the moral hazard this creates is huge, and the bastards who got us to this stage creamed the profits off their high risk games for over a decade. So now they just walk away and get to stick everyone else with the loss.
In 2007, after it was evident there were problems, the investment banks paid out almost $40 billion in bonuses. I hear the base salaries aren't bad either.
There were just under 200,000 employees. Of course some bonuses were bigger than others.
The financial world systematically failed to insure their own risk, and instead paid out too much of their profit in bonuses. When a high sigma correlated risk materialised they just want to walk away and stick the rest of us with the loss.
Information Processing makes an interesting point.
Bloomin' MIT grads...
It is one thing to tackle the root cause of the financial crisis instead of continuing to prune dead branches. But they're letting the kids who vandalised the tree steal all the fruit while they're at it.
A bailout like this requires equity impairment, claw back of funds that were paid out as bonuses when they should have been kept as risk capital, and penalties for CEOs and CFOs that lied on statements.
Anything else invites a repeat.
Even if you claw back all bonuses paid out over the past decade, you won't get anywhere near $700 billion. The bulk of that sum is mortgage loans gone bad. The main beneficiaries are the reciepients of those loans, i.e. no-/low-income Americans who "bought" houses which they could not afford. In the end, what this exercise amounts to is socialized housing for the poor, a quintessentially Socialist (a.k.a. Old European) project, sneaking into "capitalist" America through the back door. I'd say the proper comparison for those $700 billion are welfare costs in the EU area over the past ten years. It would be interesting if somebody dif the sums and reported which scheme has been more cost effective.
An exceptional take on the issue:
It's exceptional in the sense that usually it's a parody site, but this time they seem to be serious.
As seen from here in Europe, the Bush administration has already moved all taxpayer money from the Treasury to Halliburton et al, and now they are purloining future money - while they still have the chance.
AGeek - I guess I need to go read the paper again. Where does it say that the people who have defaulted on their mortgages get to keep their houses if this bill passes?
Ethan, I don't know which paper you are referring to, but if you think anyone is interested in (1) having millions of new homeless puring into the streets while (2) adding to an already record stock of unsold homes, you're probably thinking of Democratic party strategists.
This bailout boils down to this: the elected government buys bad mortgages from the banks and becomes the new landlord of the lowest income *voters*. Very Old Europe.
Ageek seems confused about mortgage economics. The poor people who default on the home loans do not get to keep the homes. The homes are repossessed and the defaulters are evicted. Then the mortgage lien holder resells the note for whatever return he can get. If it turns out to be less than the original mortage value, the lien holder can absorb the losses or sue the defaulter for the difference and try to collect the losses in court.
So under this Bush plan, the lien holders will get all their money back from the government, while the loan defaulters will have their homes repossessed and their credit ruined. Then when the government tries to resell the homes, the original lien holders, now flush with government cash, will buy up the homes at a discount and resell them for a second profit.
I'm just enjoying the charm of watching Ageek slam the Democrats while the largest financial debacle of our lifetimes unfolds as a direct result of Republican policies.
Mind you, it's made somewhat funnier by the fact that I'm not living in the US right now. I might be in a more homicidal mood if I were still there.
If it turns out to be less than the original mortage value, the lien holder can absorb the losses or sue the defaulter for the difference and try to collect the losses in court.
Option #2 is not always legally available, depending on the state in which the property is located and circumstances of the loan. According to multiple commenters over at CR, a purchase-money mortgage in California is considered nonrecourse (which is the technical legal term for a prohibition on deficiency judgments), although they could pursue deficiency on a refinanced mortgage in a judicial foreclosure. More frequently, recovery is impractical; it's akin to squeezing blood from a stone.
That said, this bill is a bad idea. Even if everything else about the bill were perfect, the concept of letting one man make decisions about >=$700B of taxpayer money, with no recourse for second guessing, is sufficient to make this a bad bill. And the rest of bill as written is far from perfect.
Ethan, I have very lttle sympathy for Republicans, and little more for Democrats. They are both responsible for this socialization debacle (although a historian would trace its roots to Roosevelt and the creation of Fannie).
Jim, if you really believe that the government is going to evict millions of voters whose mortgage loans it's taking over, you are more than confused; you are naive. It just isn't going to happen. The loans will be renegotiated and those people will stay right where they are. Risk of social unrest aside, it is in nobody's interest to repossess unsellable homes in the midst of a giant housing glut.
I would not be overly surprised to see some politico propose a bold and innovative plan to demolish surplus houses at some point...
(1) My biases include:
(a) I've been elected Town Councilman in 2 different states, written speeches and white papers for Presidential campaigners, and have a clue about politics;
(b) I own a home in California whose estimated value has declined $1,000 per day for a year and a half.
(c) For 81 days my state had no budget proposed, let alone passed, so I was threatened with being paid in IOUs for the full-time public school teaching job that I took 2 huge paycuts to accept.
(d) I'm also published in Mathematical Economics and Business Management.
(2) My main conclusions of the $$$ mess we're in:
(a) USA has only one major party, the Property and Incumbency party, with two wings claiming to be be very different (they are somewhat different).
(b) The bipartisan Mafia that stole roughly $10^12 piecemeal and another $10^12 or so for Iraq was surprised that this makes it harder to steal the next $10^12, as there is some fallout.
(c) So they've decided to steal the next $10^12 in one bold move.
(d) The big lie is that this is to "protect" our homes and retirement funds and insurance. To the contrary, as we don't have that $10^12, we will "print money" on the order of $10^12, raise the debt limit to $10^13, and thus in one fell swoop dilute away roughly 10% of all wealth of the typical retiree, homeowner, taxpayer, and/or citizen.
(3) My friends are split on whether this is:
(a) The biggest financial crisis since World War II;
(b) The biggest financial crisis since the Great Depression;
(c) The biggest financial crisis since the Declaration of Independence;
(d) The biggest financial crisis since the invention by Maciavelli et al of the Nation State;
(e) The biggest financial crisis since the transition from hunter-gatherer to settled agriculture.
I toned this all down so as not to alarm anyone. I've also oversimplified.
The bulk of the bad loans are not to "poor people".
A significant amount is for home loans in the primary "bubble" areas, that is true, including California, Arizona, Florida and Nevada.
However, this included a lot of middle class who stretched to buy using "innovative" loans, even though the only conceivable way to pay for the loan was if there was massive appreciation leading to refinancing or sale.
A lot of the bad loans went to speculators who were looking to flip homes, many of whom lied on loan applications, claiming residency when they bought investment properties (investment loans usually have higher interests and requirements for downpayments, for a reason).
A lot of the really bad loans are refinances of people who cashed out equity or took out second loans. These are now worthless, since the debt is junior to the primary mortgage. A lot of those loans went on expensive cars, and other conspicuous consumption, for middle class home owners who felt asset rich.
The total in bonuses paid out by the investment banks over the last decade was maybe $2-300 billion. Keeping maybe $100 billion, plus interest and appreciation, would have gone a long way to covering the crisis earlier on, and maybe kept some of the firms solvent.
The investment banks took high systemic risk, skimmed the profits without insuring themselves against their own operational risk, and now want their losses covered.
Privatize the profit, socialize the loss.
PS: the government will mostly be buying mortgage bonds and derivatives of such, not the mortgages themselves - since mortgages are not just bundled, but are also sliced and mixed, the governement will mostly not have direct ownershop of liens - rather they'll own billion dollar bonds composed of $200 million of Miami condo primary mortgages, $200 million of Bay Area refinances, $200 million of SoCal second mortgages and $200 million of midwest home equity loans.
The foreclosure decisions will be made by servicers of individual loans based on their legal obligation to maximize the return to the (unknown) bond holders owning the loans.
The government does not have the facilities, manpower or expertise to service loans.
I realize it's been all of two weeks, but maybe we shouldn't forget that the government took over the two largest mortgage loan originators by far on September 7...
Which promptly led to Fannie and Freddie mortgages becoming harder to get.
Fannie and Freddie really got into rapid trouble because they were forced to take on Alt-A jumbo mortgages, not the "normal" capped mortgages they usually funded.
They were forced to do so after investment banks lobbied congress to change the rules on Fannie and Freddie, so that loans between $400k and $700k that were going bad could be dumped on them. This was the proximate 'cause of Fannie and Freddie going under.
Not exactly low income housing in most places.