The $700+ Billion Scam

The same people who brought you the housing market meltdown now want the American taxpayer to fund billions of dollars to bail out Wall Street firms because, apparently, if you do not your retirement funds, your job, and your pursuit of happiness will all go up in smoke. In testimony today before the Senate Banking Committee, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke warned of dire consequences of inaction. Pressed to explain by the Senators to explain the parameters of the current financial crisis and what the dire consequences may look like, the secretary and the chairman were vague. They were equally vague in describing their bold plan to save the Wall Street lenders from their bad decisions. By my recollection, the gang that felt no need to step in to rescue homeowners from losing their homes because of "moral hazard" did not once utter the phrase "moral hazard" in testimony today asking for a free handout for the lenders who represent the other half of the mortgage transaction.

Instead, Secretary Paulson presented a terse piece of legislation that demanded of the American taxpayer billions of dollars. The legislation he wants gives him extraordinary powers:

The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

Paulson presented this bailout plan as the solution to the credit problem that apparently will take down the American economy. When pressed to tell the Committee how this bailout will help homeowners avoid foreclosure, Paulson said that "unfortunately" many homeowners would be collateral damage. In fact, given the description the secretary offered of government buying mortgages in reverse auctions at "hold-to-maturity" prices, this bailout plan will likely lead to more foreclosures rather than less as lenders will feel no pain in choosing foreclosure over the options of loan modifications or short sales.

Then there is the whopper in the legislation that no one seems to talk about. This bailout plan is termed as a $700 billion bailout plan. However, that is not what the language of the proposed legislation says. The legislation states in Section 6:

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

That is not the same as a $700 billion limit on the bailout plan. The government could spend many more billions purchasing bad debt, as long as they do not hold more than $700 billion of "assets" at any given time. The government could literally become a clearinghouse for bad debt purchased at high "hold-to-maturity" prices and sold at much lower fire sale prices. Without the oversight or controls this plan lacks, this bailout will become a corporate gravy train and a massive scam on the American taxpayer.

The American taxpayer should reject this bailout proposal in favor of more sensible government action to stabilize the credit markets. The American taxpayer should not be blackmailed into any bailout plan – there is no evidence that Congress must act in a matter of days. There is plenty of time for careful deliberation as the financial markets digest the news of expected congressional action.

Just as homeowners have lost their homes, and are losing their homes, as the housing market struggles to find the bottom, so should corporate lenders pay the financial price of their reckless decisions. The government’s job is not to prevent corporate bad actors from collapsing, nor is it the government’s job to pay off corporate fat cats. The government’s job in this case is to allow for a soft landing as the market finds the bottom.

A $700+ billion scam on the American taxpayer is not the answer.

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5 Responses to The $700+ Billion Scam

  1. jasper says:

    Those bastards! They are all from the same wolf pack.
    How wicked of them to flatly say “many homeowners would be collateral damage”.

  2. Kaiser Kabir says:

    Here’s a brilliant article on the subject.

    http://faculty.chicagogsb.edu/luigi.zingales/Why_Paulson_is_wrong.pdf

  3. jasper says:

    I don’t necessarily oppose loaning the money to Wall Street, but the provisions need to make sense, need to be open to public and need to be beneficial to the struggling home owners (not the fat cats).

  4. Mash says:

    Jasper, looks like a lot of provisions are being put into this proposal to make it more sensible for the American taxpayer – but now of course John McCain just took a giant dump on it. What an idiot.

    Kaiser, thanks for the article. I am now reading through it. I am also awfully skeptical of rewarding risk for corporations. There have got to be provisions to make the banks take the hit for the excessive risk they took. After all they had to have factored the risk into their transactions, right? If they dont absorb the costs, then we are creating moral hazard on a massive scale here. That, in the long run, will have severe consequences for all of us. If the situation is this dire, then some failures have to occur. The government’s job here is to make sure it is orderly, not to artificially prop up bad actors at the expense of the taxpayer. If the taxpayers pay, they must also own. No freebies for the wizards of Wall Street.

    It seems to me what spooked Bernanke and Paulson was what could happen to the two remaining big investment banks. Goldman isnt worth more than the American taxpayer (no matter how many friends Paulson has over there), and they will have to eat some of this before we bail them out. Now, tonight, we see that, as expected, WaMu has collapsed. Perhaps a good thing, methinks. But I’d hate to be on Wall Street tomorrow. I think we are going to see a huge plunge at the beginning of the day. John McCain probably spooked the markets even further today with his idiocy.

  5. How long will it be before more money is required, Is this just a short term fix ?

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