The rescue plan now includes those four principles. It also includes a proposal I made yesterday morning to expand federal deposit insurance for families and small businesses across America who have invested their money in our banks. This will boost small businesses, make our banking system more secure, and help restore confidence by reassuring families that their money is safe....
I know many Americans are wondering what happens next. Passing this bill will not be the end of our work to strengthen our economy – it’s just the beginning of a long, hard road ahead. So let me tell you exactly how I’ll move forward as President.
From the moment I take office, my top priority will be to do everything I can to make sure that your tax dollars are protected. I will demand a full review of this financial rescue plan to make sure that it is working for you. If you – the American taxpayer – are not getting your money back, then we will change how this program is being managed. If need be, we will send new legislation to Congress to make sure that taxpayers are protected in line with the principles that I have put forward. You should expect nothing less from Washington.
If we do have losses, I’ve proposed a Financial Stability Fee on the financial services industry so Wall Street foots the bill – not the American taxpayer. And as I modernize the financial system to create new rules of the road to prevent another crisis, we will continue this fee to build up a reserve so that if this happens again, it will be the money contributed by banks that’s put at risk.
This will only work if there is real enforcement and real accountability. And that starts with presidential leadership. So let me be very clear: when I am President, financial institutions will do their part and pay their share, and American taxpayers will never again have to put their money on the line to pay for the greed and irresponsibility of Wall Street. That’s a pledge that I’ll make to you today, and it’s one that I’ll keep as President of the United States.
Anybody want to chime in on this? Obama's idea is to pass the bill, carefully manage the assets in various ways to work to taxpayer advantage, and regulate and build up a reserve to prevent future disasters. Vague, yes, but does this seem like a sensible approach?
4 comments:
This bill is a bad idea in every way. I am scared that it was even presented for a vote before Congress. First off, if these "toxic" assets are actually worth something, why isn't someone on Wall St. buying them up? Buying these assets is essentially betting that people, who shouldn't have been given loans in the first place, will repay them. I wouldn't put my own personal money on the line for an investment like that. The taxpayers will inevitably be left holding the tab. The truth is, these mortgage-backed-securities are worthless. Wall St. knows it and that is why they are in trouble and asking for a bailout. This bill is a disaster. It will put the government in the awful position of determining how much each asset is worth (ie. making up a price, because the market says they are worthless) and then deciding which companies are eligible for the assistance. This will foster all sorts of corrupt behavior and incentivizes strategic behavior by asset holders to maximize their apparent losses. Shame on McCain and Obama and everyone else on Capitol Hill for running headlong into a frenzied "the-sky-is-falling" panacea that will result in more painful problems later. Other solutions have been presented that avoid these problems, as well as avoiding the "moral hazard" this whole bailout creates. For an example see George Soros' plan at http://biz.yahoo.com/ts/081001/10440222.html?.v=2. Everyone stop. Breath. Think.
Ben, are you taking sides with George Soros? Strange bedfellows indeed!
This is WAY beyond my competence, but I don't think it is right to say that the securities are "worthless." They are not being purchased, perhaps, because of the liquidity problem. Many economists and financial types I respect say that the securities right now are undervalued and will probably gain value once the market unfreezes. Brad Delong, for example, points out that governments have sometimes in past come out ahead in bailout schemes (1994 Mexican bailout). The key seems to be how the bailout is managed -- the government needs to drive a hard bargain, have proper oversight, etc.
Here is the most optimistic scenario I've read:
"Bill Gross of the bond-fund behemoth Pimco is even more upbeat. He estimates that the average price of distressed mortgage debt that will pass from troubled financial institutions to Treasury will be about 65 cents on the dollar, representing about a one third loss for the seller from face amount. Financed at 3% to 4% by the sale of Treasury debt, Treasury will be in a position to earn a positive carry, or yield spread, of at least 7% to 8% on the purchases, even after taking into account severe assumptions of default rates and foreclosure recoveries. Treasury, after all, has the lowest costs of funds around. As an unlevered investor, Treasury likewise faces none of the liquidity problems that can force a private investor to sell securities at an inauspicious time. Treasury has the ultimate luxury of time."
http://www.smartmoney.com/barrons/index.cfm?story=How-Taxpayers-Can-Profit-on-the-Bailout
Of course, other people I respect say exactly the opposite. Hence, my confusion.
Other links:
http://www.guardian.co.uk/business/2008/sep/24/warrenbuffett.wallstreet
http://www.latimes.com/news/nationworld/nation/la-fi-cost28-2008sep28,0,1002717.story
http://www.chicagotribune.com/business/chi-sat-how-it-works-sep20,0,5185626.story
Bryan, good points. I suppose my skepticism is due to my doubt that the government can effectively “drive a hard bargain.” Granted, the assets likely have some value (although in my opinion it will be pennies on the dollar). It also should be kept in mind that people like Warren Buffet who are championing this strategy have a vested interest in seeing it succeed. Note Buffet’s $5 billion dollar interest in Goldman, which would be a large beneficiary of this bailout. An interesting article written by the IMF reviews 42 financial crises in various countries and, among others, draws the following conclusions:
• State-run asset management companies for distressed assets have been shown to be “largely ineffective.” (p.23)
• “A lack of attention to incentive problems when designing specific rules governing financial assistance can aggravate moral hazard problems, especially where these institutions are weak, unnecessarily raising the costs of resolution.” (p.14)
• Recapitalizing banks through purchasing preferred shares (and other capital infusion methods through bonds, subordinated debt, etc.) results in sooner resumption of credit supply and smaller losses of output. (p. 24).
• Recapitalizing distressed companies in this manner allows the government to maintain a degree of control over the management of the companies after assistance has been given, preventing abuse and shareholder (ie. taxpayer) losses. (p. 24)
• Recapitalizing in this manner avoids the problem of pricing assets with no ascertainable value, rather the government would merely purchase stock at prices set by the market. (my own point)
http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf
While there is evidence in the article that the current bailout strategy has had some success in other financial crises, I am of the opinion that it creates more long-term problems and will result in more taxpayer dollars and more risk than the alternative.
Yeah, the IMF report is a little scary given our current trajectory. I'd heard about it, but didn't know the details.
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