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  • September 23, 2008 10:46 AM EDT by Elizabeth MacDonald

    The Bailout Scorecard

    "Common sense teaches that booksellers should not speculate in hops, or bankers in turpentine; that railways should not be promoted by maiden ladies, or canals by beneficed clergymen ... in the name of common sense, let there be common sense."--Walter Bagehot, 19th-century economist

    Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, Securities and Exchange chairman Christopher Cox and James Lockhart, director of the Federal Housing Finance Agency, all warned the economy and the markets would face severe distress if the Congress does not pass the Administration's $700 bn plan to bail out the financial industry.

    Fed chair Bernanke went so far as to warn the Senate Banking Committee today that a "recession" with a higher jobless rate and more foreclosures would ensue if elected officials fail to act.

    It's the first of two days of testimony for Paulson and Bernanke as they explain to Congress and the public the necessity of the financial industry rescue that could cost over a trillion dollars.

    The four take to Capitol Hill to defend the biggest pre-emptive fiscal strike that has ever been seen in the history of this country.

    It's a pre-emptive strike that is of a piece with this Administration, a bailout plan to ward off a potentially calamitous unwinding of the financial system due to massive leveraging by financial companies across the country.

    It is a debt load that has the stock markets and the economy lumbering through quicksand.

    The markets moved up and down during the hearing, over fear that Congress would delay the $700 bn government fund to buy toxic assets from banks, and also over worries the plan may not work to turn around the housing and credit crisis.

    Indications of a delay also sent the dollar higher, as the futures markets watched to see whether the plan would pass soon, which would start the government's printing presses, weakening the dolllar.

    Fed chairman Bernanke cut to the chase and moved to paraphrase remarks several paragraphs down in his prepared statement, saying: “Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.”

    The concerns are real, the details complex.

    And chilling.

    Notably, SEC's Cox warns that the $62 tn credit defaults swaps "is regulated by no one," adding, "neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market." (Credit default swaps are essentially derivatives that insure other derivatives, like collateralized debt obligations).

    The Heart of the Crisis

    As the housing plunge has yet to find its bottom, the value of mortgage-backed securities has plummeted, triggering $514 bn in writedowns and losses that have left institutions with too little capital to support lending.

    The writedowns arose from a drunken daisy chain of paper kryptonite in the form of bad credit derivatives Wall Street's printing presses pumped out that have vaporized profits earned during the housing bubble.

    Many banks can't raise the money they need to finance lending and so are selling assets, hurting their earnings power and stock prices even more.

    Many shares in companies, including American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE), as well as Washington Mutual (WM), are trading at levels around the cost of a gallon of gasoline or milk.

    The writedowns and losses have been severe. For example, take a look at Bank of America's (BAC) balance sheet, which sports $1.7 tn of assets, but just $84 bn in tangible book value (the difference between "hard" assets and liabilities).

    That's a tiny amount to support that big book of business, a balance sheet now digesting Countrywide Financial and Merrill Lynch (MER).

    Amidst a firestorm of criticism, the US government is stepping in to save a free market that has turned into a free-for-all, with the government looking like a chaotic fire brigade hosing down crises with taxpayer money, raising voter anger hot enough to melt steel that the country is turning into the United States of Bailouts.

    A costly after-the-fact refereeing because Washington, plied with lobbyist dollars, does not have the intestinal fortitude to stop problems before they erupt.

    Wall Street's Reckless Borrowings

    Wall Street borrowed against its assets by a ratio of 30 to one, even 40 to one, a ratio which doesn't take into account the hundreds of billions of dollars of truly noxious subprime debt held in off-balance sheet vehicles, called structured investment vehicles (SIVs).

    The practice led one European official to wonder aloud that he thought off-balance sheet entities went the way of Enron.

    Some $55 bn is slowly bleeding back onto Citigroup's (C) balance sheet. Fannie Mae (FNM) and Freddie Mac (FRE) are believed to hold some $3.3 tn in hedges off their balance sheets, Wall Street analysts say.

    Indeed, Fannie Mae and Freddie Mac were the US economy's own off-balance sheet vehicle which only helped move the needle on the homeownership rate at some four percentage points over the last decade.

    Paulson is Angry

    "Am I angry that taxpayers are on the hook? Yes, I am angry taxpayers are on the hook, but taxpayers were already on the hook," by a potted financial system that Congress and the US government allowed to fester and sanctioned for years, Secretary of the Treasury Paulson testified, noting it's past time "to get to work" to fix the problems, and that he's talked to central bankers around the world to enact similar plans.

    The Thinking Behind the Plan

    The Paulson plan is to buy up to $700 bn in mortgage-backed securities and then auction them off to investors, which could put a floor under their price and stop the downward spiral in the credit markets.

    But no one knows what these assets are truly worth.

    If the Treasury underpays, banks would take write downs, hurting their balance sheets and ability to lend. If they pay too much to buy these assets from banks, taxpayers end up backing that overpayment to reckless financial companies who leveraged themselves up to the stratosphere.

    Treasury Wants It All

    The current plan would set up a huge fund, potentially costing $700 bn, answerable to the Treasury Secretary.

    Specifically, Paulson's plan says: "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...The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this act...without regard to any other provision of law regarding public contracts."

    It goes on to say, "Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure."

    What to Watch Out For

    But a growing number of Congressmen want the fund to be run by an independent board, with oversight by the Office of the Comptroller of the Currency.

    Watch Congress move fast to dial back the blank-check powers Treasury now wants to arrogate to itself.

    In his opening remarks, Paulson testified: “You can be darn glad you gave us the bazooka,” referring to his own wording several months ago in the rescue of Fannie Mae (FNM) and Freddie Mac (FRE).

    Paulson then moved quickly to dismiss the idea that the Treasury was moving forward without oversight, noting that Treasury always took Congressional oversight into consideration.

    “We need oversight, we need transparency we need protection and we need it to get the job done,” Paulson said, adding the plan would save taxpayers money. “Again I’m frustrated the taxpayer is already on the hook and will suffer the consequences if things don’t work. The best protection is to have this work," adding he believes the plan "will protect taxpayers."

    Economist Edward Yardeni notes the Treasury's plan to auction off these distressed securities might work and save taxpayers money, as an auction would set "the lowest price from banks seeking to dump the worst of their portfolios on the government,” and also because it’s still unclear which investors will step forward to buy this distressed paper.

    Meanwhile, negotiations between the House and Senate and the Treasury are going on in advance so that both houses pass the same bill and it goes to the President right away.

    That's supposed to be this week, but House Financial Services Chairman Barney Frank (D-Mass.) says passage could slip into next week--something the markets would not like at all.

    The Details Being Hashed Out Now

    Along with adding things like more oversight, a growing number of Congressmen want companies who sell assets to the government to let taxpayers subsequently own shares in the company.

    Treasury secretary Paulson doesn't want the government buying equity stakes in participating companies as a condition for selling assets to the fund. This would augur towards, Paulson believes, only severely weakened companies taking part in the fund.

    Also, Senate Democrats want tighter measures to stop foreclosures, curbs on executive compensation and a change to federal law so that judges can modify a bankruptcy filer's primary residence mortgage, which lenders heatedly oppose.

    Under current law, judges may only modify loans on second homes. The lending industry has strongly opposed such a provision.

    An Optimistic Timeline

    According to a proposal from Senator Christopher Dodd (D-Conn.), the Treasury's authority to buy damaged mortgage-backed assets would last only one year, and would end by Dec. 31, 2009, versus the Treasury's proposal which asks for two years from the date of enactment.

    Both are overly optimistic.

    The Resolution Trust Corporation of 1989 and the early nineties, set up to liquidate 747 thrifts with assets of more than $350 bn, took about six years to do its work-out. It ended up costing more than $500 bn on an inflation-adjusted basis, more than its initial estimated $50 bn pricetag.

    President Herbert Hoover's Reconstruction Finance Corp. of 1931, in which the government stepped in to support lending by the manufacturing sector, including rail roads, a move which eventually didn't forestall a deepening of the Great Depression, took 21 years to unwind (though it eventually morphed into an effort to support World War II).

    Bernanke Backs the Plan--and Walks the Talk

    Fed chairman Bernanke testified he supported the Treasury's auction plan.

    He also testified about how marked-to-market accounting rules have triggered massive writedowns on mortgage-backed securities, as the rules say companies must pricetag these assets as if they were to sell them today. Since the markets remain frozen for them, the prices are fast bottoming out.

    Instead Bernanke noted “many banks” support "hold-to-maturity accounting," which means banks could sit on these assets and not have to value them under the marked-to-market rules, thus delaying the writedowns--or recording of profit--down the road until they actually sell these assets.

    Curiously, economist Edward Yardeni notes that since mid-March, the Fed has held on its balance sheet an asset identified as Maiden Lane, the portfolio of toxic assets acquired from Bear Stearns when it helped orchestrate the merger between Bear Stearns and JPMorgan Chase (JPM) last March.

    Yardeni notes that “apparently, the Fed isn’t obliged to mark to market [these securities] since the value of this portfolio is still $29 bn, the same as the original acquisition price.”

    Questions Arise

    Of course it can't be ignored that the US government has at least $40 tn in off-balance sheet debt in present value commitments owed on Social Security and Medicare (costing eventually some $99 tn, says the Dallas Federal Reserve).

    Now taxpayers back $5.4 tn in mortgages, too, from Fannie Mae (FNM) and Freddie Mac (FRE)--as well as an up to $80 bn credit line to American International Group (AIG), the $29 bn in securities taken on by the Federal Reserve in the Bear Stearns' rescue, and a potentially $700 bn bailout of distressed mortgage-backed securities.

    But perhaps (a thin reed of hope) the $700 bn may be a ceiling amount and the bailout may not cost that much, as already some $514 bn in losses and writedowns have been taken by banks and investment firms around the world. So, the debate is whether there are still $700 bn in mortgage-backed securities still to be bought.

    Economist Edward Yardeni and his team say some $600 bn in toxic assets (called "level 3" assets under accounting rules) still sit on Wall Street. It remains to be seen whether all of that sum gets dumped on the government (meaning, taxpayers).

    However, if some financiers have their way, the government would also swallow all sorts of credit-backed securities, of all stripes, namely credit card, student loan, even auto loan derivatives, costing taxpayers even more.

    That would be a bad move--fix the housing crisis first and the rest will follow.

    Secretary Paulson, when asked about this issue, testified the "vast bulk of our efforts should be aimed at mortgage securities" but that the Treasury asked for "broad authorities" to deal "with a variety of securities as needed," as the plan might aim at helping a broader range of assets in order to "free up the financial system."

    Other Questions Remain

    Will all 8,400 banks and thrifts have access to the new fund, or just the sickest ones, who decides which banks and thrifts are the most ailing and how does the government define that standard?

    Also, foreign banks with US backed securities evidently now have access to the portfolio, under the Treasury plan. But can hedge funds participate? Nothing on that just yet, though some Congressmen say no.

    And will the government publicize the names of companies unloading bad debt securities on the $700 bn fund? The Reconstruction Finance Corp. did, publicizing names of banks borrowing government money, triggering fears of a run on banks around the country.

    The Federal Reserve Opens the Barn Doors

    Meanwhile, Federal Reserve chairman Ben Bernanke may have to answer questions to the fact that the Federal Reserve threw open the doors to investment in the US banking industry by letting private equity firms, with $400 bn in capital, sovereign wealth funds, with an estimated $2 tn to $3 tn in assets, and corporate investors buy stakes in banks.

    All in the hope that this would direct much-needed capital to the US banking sector.

    The Federal Reserve plans to raise the maximum stake a minority investor could take in a bank holding company from 25% to 33% in some instances and lift the ban on board representation for minority investors.

    Already, the private-equity firm TPG (formerly Texas Pacific Group) led a $7 bn investment in WaMu earlier this year. National City has benefited from private equity capital too.

    Buyout firms such as Warburg Pincus and Kohlberg Kravis Roberts & Co. have lobbied federal banking officials to loosen their restrictions, the Wall Street Journal reports.

    Private-equity firms are hoping to repeat the success some enjoyed after the savings-and-loan debacle in the late 1980s and early 1990s, when they bought S&Ls on the cheap and reaped big profits, the Journal reports.

    This raises conflict of interest issues. Would a Henry Kravis push a commercial bank to lend money to a risky, private client for a quick buck, and if that loan fails, would taxpayers be on the hook? (answer: yes).

    And will Congress let sovereign wealth funds buy controlling stakes in US banks?

    Will Congress, say, let the Russian sovereign wealth fund, the Kuwaiti Investment Authority, the SWF owned by Abu Dhabi, or China's SWF buy controlling stakes in US banks, after the US Congress has stymied foreign investments in US companies (earlier this year thwarting China's attempt to buy a stake in 3Com, for example)?

    What's Next for Wall Street Investment Banks

    Meanwhile, storied investment firms Goldman Sachs (GS) and Morgan Stanley (MS) have become boring old commercial banks in a day. They gave up on attempts to remain as the last two investment banks standing to become "bank holding" companies. Both already own industrial loan companies based in Salt Lake City, Utah that can easily be turned into banks, sources say.

    The move lets them gain access to bank deposits as a source of funds and also gain permanent access to Federal Reserve liquidity support via the discount window, access now on a temporary basis.

    The Fed's move comes as the discount window is under duress, with record borrowings, partly due to the Federal Reserve expanding the list of accepted collateral at the window.

    Also, the short-term collateralized loans in the repo market are also under strain due to the run on money funds, as these funds help fuel and provide liquidity to the repo market.

    In return for that access, the two must meet new, tougher capital ratio requirements, the amount of funds they must have on hand to do borrowings. To meet these tighter requirements, they'll either have to cut their leverage ratios in half or raise capital, or some combination of both. They are now levered around 20 to 1 to 30 to 1.

    Their business activities are more speculative than deposit-taking banks, so their capital ratios should be commensurate with their more risky ways of earning money.

    The two may potentially merge with smaller, more solid commercial banks, or continue to get funding from outfits like Mitsubishi UFJ Financial, which bought a 20% stake in Morgan Stanley for as much as $8.5 bn.

    The Office of the Comptroller of the Currency would oversee the commercial banking entities for Morgan Stanley and Goldman, while the Fed will be the key oversight agency for the two firms' overall capital levels and soundness. The central bank already oversees other major bank holding companies, such as the parents of Citibank and Bank of America.

    Here Comes Inflation

    The U.S. government will need to print money to pay for its new plan, which is why Treasurys are trading at record levels. The plan could add up to $700 bn to the money supply, blowing out the M3 portion of the overall money supply by nearly 10%. But $700 bn may not be spent.

    Whatever the sum, all of this will cause inflation. Which is why gold prices have soared higher by $40 an ounce and oil $16 a barrel-meaning more money for the Organization of Petroleum Exporting Countries [OPEC] and other oil producers, already seeing record receipts.

    A Better Way?

    Brian Wesbury, chief economist, First Trust offers this plan this morning-this is straight from his research report:

    All of this can be avoided if a system were put into place that allowed private companies to hold these distressed assets. Rather than a centralized holding place, why not use a decentralized one?

    Why not allow financial firms with structured (Tier 3), (EMAC: the most insolvent ones) assets issued between December 2003 and August 2007 to suspend mark-to-market accounting for those assets, and receive government insurance as a backstop?

    This would be a temporary solution, not requiring any ultimate change in Sarbanes Oxley or mark-to-market accounting rules, and the government could even make money by selling insurance with less risk to the taxpayer than buying them outright.

    In essence a firm could sequester, or firewall off these specific assets from the rest of its balance sheet, and either finance this itself, or bring in outside financing. The firm would promise to hold the securities to maturity, or until government insurance was no longer needed when it liquidated the assets.

    All of these deals could be settled in the private sector, in multiple locations with the government looking over the shoulder of each deal.

    If the rules had been relaxed a little bit for these specific assets, Merrill Lynch could have created its own private equity investment fund inside its corporate structure instead of selling at a huge loss to Lone Star, which created its own holding vehicle.

    This plan would leave mark-to-market accounting regulations intact. It would be a temporary change in the rules. Its most important attribute is that it leaves taxpayer powder dry for another day. It also allows the private sector to price assets in an environment that is not contrived and will help avoid the loss of, or government takeover of, more private firms.

    Even if the Treasury initiates an RTC-type vehicle, the slight changes in the accounting rules for these specific assets should still be made. If a firm does not want to accept the government bid for its distressed assets it would have an alternative.

    It would also create a level playing field because the Treasury does not have to mark-to-market. A competitive marketplace for these securities would insure the current holders that they would get a price that is not based on a fire sale.

    This plan stops the mark-to-market meltdown without undoing the good that mark-to-market accounting has done, protects the taxpayer, stops the losses at financial firms at a crucial time, and therefore helps end the shorting of stock and bonds that has kept the financial system on the rocks without making it illegal.

    Best of all it keeps the government from a massive and draconian step toward financial socialism.

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B Scott

Lets all step back and take Hillary Clintons advice, and take a breath...this subprime mess was created years ago by the powers to be, to simply prolong the economic crash.These same powers to be were the very people that outsourced the jobs overseas,they knew they had to create an illusion of prosperity,or the masses might have caught on, and questioned the lost jobs.Stop for a minute and take another one of Hillarys deep breaths, there,doesn,t that feel better,now ask yourself,if the banks hadn,t given all those insane mortgages over the last six/seven years,very little house building would have occurred,with less demand the prices would not have escalated,without the escalation consumers would not have had such a line of credit,and the economy would have tanked years ago.Time for one more deep breath,you ask why they would want to prolong the crash,,because they hadn,t finished putting together the new global cashless economic system that will be announced once they destroy the current one.

September 23, 2008 at 10:04 pm

Terry

Ms. MacDonald, Since you have been the only person on the news that knows what is going on with our financials, I am writing to you so you can make the contacts necessary to have someone watch Neal Cavutos show with Secretary Paul O'Neill. He has an answer for this mess, and it would not require the cash infustion of $700 billion at this time. I think it is time for someone to listen to him. Thanks, Terry

September 23, 2008 at 9:21 pm

Susan Palmer

In regards to Wendy Newberry's comments: As far as what the United States capital markets are concerned, you hit the nail on the head. Yes, we are having economic problems and they are not pretty. But, I've lived through too many downturns that make this one (before bail-out talks), look tame. Has everyone forgot about: 1981 recession that was the worse since the Great Depression? 15% unemployment. 21% prime rate lending. Double-digit inflation. Reached a bottom. We recovered. NO GOVT. BAILOUTS. The '80's was called the Decade of Excess. In 1987, the stock market lost 25% of its value in 2 days!! We've only been swinging 5% recently. We reached a bottom. We recovered. Real Estate bust, beginning in 1989 - 1991-92 Credit crunch. We reached a bottom. We recovered. March, 2000 - Nasdaq bubble burst. Losses could not be counted. We reached a bottom. We recovered. We are NOT in an "across-the-board" recession right now. Interest rates are still at all time lows. Unemployment at 6%. Low inflation (except for oil and food) - We have a "deflation" in real estate. What the HELL is the government thinking?? This unprecedented move could alter the course of what our free markets are about!

September 23, 2008 at 7:46 pm

matthew fiori

why do you write 'potentially costing .....' if you write this way, you are clueless. that is absolutely not the expected 'cost' right there, you do a disservice to every single person in this country who has risk in this thing which excludes no one including yourself. write what makes sense or stick to movie reviews. that is harmless.

September 23, 2008 at 7:16 pm

Chris

Provide low interest financing to the solvent institutions to buy out the insolvent banks(reward the responsible). Dissolve Fannie and Freddie in the same manner. Get away from Greenspans suicidal dollar policy(the cause of $147bbls of oil and the sky rocketing home prices). Fire the members of the house and senate banking committees that promoted the "affordable housing policy" and received money from Fannie and Freddie. I would gladly pay $2000 for each person in my family for that kind of bailout. I'd make it up in a week in my 401K.

September 23, 2008 at 5:39 pm

J. R. Snively

Our taxes are going to double. We can expect a major rise in inflation while the people that got us in this mess with fraudulent loans, lies, stock manipulation and many other unethical practices will be picking out the color of their new jets. What ever happened to accountability? Why should I have to pay for these morons and idiots who lied on their credit applications about their jobs and real income? The mortgage bankers and stock manipulators that made up these screwy A.R.M and "creative" loans should be arrested and thrown into jail and their assets seized. The loan officers that coned people should have their licenses revoked. The world will not come to an end if these banks fail. Our government keeps rewarding people who are unethical self centered liars and thieves. I can't afford to pay for the illegal aliens let alone illicit mortgage bankers. What happened to "by the people and for the people"? Maybe they ment "by the corrupt and for the corrupt". I work in the auto business and things slowed down a little with the housing mess, but it came to a complete halt when gas and diesel fuel went sky high. Oil price are omnipotent to this country. Oil prices control the price of everything we buy. If oil prices go too high the next bailout will be the auto industry. Then airlines and transportation. Then grocery stores. Then McDonalds Etc..... NO BUYOUTS!!!!!

September 23, 2008 at 4:59 pm

Befuddled

This is the cost of the deregulation. I'm not for over-regulation, but when billions of $ are involved, there needs to be more regulation, not less. Thank you, Congress, for listening to the lobbyists for the banking and investment community. Now you're doing it again. Who do we honestly think is going to take it in the shorts on this deal? The idiots who created the mess? This fiasco was created by predatory and idiotic lending practices. Don't blame homeowners who wanted to live the American Dream. Who's supposed to be the most financially sophisticated party? Lender or borrower? Interest-only mortgages, no down payments, no income to support the loan...we're supposed to feel sorry for those lenders and bail them out?

September 23, 2008 at 4:39 pm

Scott

I'm Not Your Sugar Daddy Everybody’s looking for a bailout. Now these companies are demonstrating a sense of entitlement. I believe that we the tax-payers should come out ahead if we are going to foot the bill. If we should be the lender of last resort we should make terms that will help these companies survive - but not to our detriment. The elderly have been the most powerful lobby group in the past because they are the people who have historically voted. The elderly have benefited greatly from entitlement programs for many decades as many have taken out far more than they ever put in. Now the Baby Boomers are becoming the elderly and they are beginning to collect Social Security. Because the system is a Ponzi-scheme and Congress has relentlessly raided the ‘trust fund” over the years, they are counting on my generation, generation-X to keep those payments coming. My generation as well as those who follow Gen-X are faced with the knowledge that in order to support the Baby Boomers on Social Security and Medicare, we have to face the fact that we have been working for the past 20 years, paying into this system and will receive nothing in return. Not only that, they are demanding that we continue to work and pay even MORE into it while we KNOW that we are getting the old shaft. That’s supposed to be our civic duty. A great deal of concern has been expressed about the government taking over companies like AIG. The government owning the dominant players in various industries brings about fears of Socialism or Communism. With the AIG proposed bailout, the government would own 80% of the company. The stock has consequently fallen headlong to reflect such a dilution. My thought on the matter is that the government should not retain ownership but rather the new equity for all “bailed out” companies should be placed in “privatized” retirement accounts in custody for generations following the Baby Boom who have been paying into Social Security for a specific number of years. These can be special class B, dividend paying shares with less voting power, leaving the control and operation to the private sector. If companies like GM, Ford & Chrysler need to come to us for a “bail out”; they should be subject to the same terms. Nobody would force them to go to the tax payer. If they hadn’t run their companies imprudently, they wouldn’t have to agree to such terms. This system would keep the government out of the operation of these companies, save jobs and avert a meltdown while helping to solve an enormous problem we are going to be facing in the coming years with Social Security. Any other plan will likely result in the government turning around and selling off valuable assets to Goldman Sachs for pennies on the dollar while the tax-payer gets left with the garbage. This way the only people who lose will be the people who purchased the stocks of these companies, which is fair since that is the inherent risk one takes when investing in equities. That is why we diversify. The same goes for the mortgage bailout. The assumptions are perhaps overly pessimistic as to the number of expected “toxic mortgages”. If the tax-payers are expected to assume the bad mortgages, our elected charlatans need to see to it that the good mortgages in the bunch end up in the custodial accounts as well. These custodial accounts need to be “tamper proof”, meaning that under no circumstance can politicians raid them for their prodigal spending. I expect resistance to such a proposal for the same reason why they resisted “privatizing” Social Security in the first place: In such custodial accounts, Congress cannot plunder them and replace stock with IOU’s. Their specious rhetoric about how “risky” this would be wouldn’t be as effectual because we are already agreeing to take the risk due to the alternative risk of allowing these companies to fail. They couldn’t claim that this is a conspiracy to drive up stock prices through excessive buying because the stocks are falling as a result of share dilution. The beneficiaries would be the people who are going to become the victims after all the Baby Boomers are receiving their Social Security checks. We could use this “rescue plan” as an opportunity to deal with two problems at one time and set in motion a plan for the gradual phasing out of Social Security starting with Generation X. Eventually these companies will come back and command market caps in the hundreds of billions of dollars. Once that happens, the positions in such accounts could be gradually unloaded into the marketplace and replaced with low cost index funds that have historically returned over 10% per year long term without having each beneficiary day trading their accounts, a preposterous notion the opponents of privatization have often propounded in order to maintain the status quo of their unabated plunder.

September 23, 2008 at 3:55 pm

D Martin

I just want to agree with Dave Young, The fundamental question, is whether to let Wall Street and certain investor entities take a severe hit, or let the Fed (all U.S.taxpayers) take a severe and protracted hit. I vote for Wall Street taking the hit, and let`s protect the credit of the Federal Government. If the Fed weakens, we all suffer in the global economy for years to come. If investors in subprime debt take it in the shorts, we will move on. Borrowers in 2009-10 can resort to (if necessary) new goverment backed loan programs with stricter credit standards than before. Let us also remember that there are foreign banks and non-domestic capital that can lend to domestic borrowers to fill the void….. witness Barclays move to shore up Lehman. End.

September 23, 2008 at 3:47 pm

diane

I'm on your side Larry. Thanks for your input. Do you know how many of these mortgage loans were given to illegals?

September 23, 2008 at 3:32 pm

David Wit

Instead of handing money over to lenders that have failed in the past to show discretion as to the ability of person to pay back, wouldn’t it be better to set up a government based lending firm something like the Virginia Housing Administration that I acquired a loan through some 30 years ago at 9% when the bank rates were around 20% ? We need to be very careful here because of the super rich that will find away to steal this money also.

September 23, 2008 at 3:27 pm

Tim

When I read this rediculous quote from CNN, it brought to the surface the reality of how a lot of people think. "Another complication is that some borrowers just can't afford to keep their homes. The government can't do much for them." - Tami Luhby There are those who have compassion for those who can mismanage millions or trillions of dollars because they made poor choices, but when it comes to the individual American who made poor choices they're simply pushed under the bus. Another quote that concerns me is this one: "They key question here is, we want to help homeowners that want to stay in their homes and have the financial capability to stay in their home," Treasury Secretary Henry Paulson said on Sunday. "And the vast majority of foreclosures in this country...are coming from people who either don't want to stay in their home, took out loans they couldn't afford as the result of irresponsible lending practices." Notice the blame is slanted towards the individual, even though there is mention of ". . . irresponsible lending practices." A lot of people are at "fault" here, so bailing out one demands the bail out of the other. Do this or let the chips fall where they will. I'm against the bailout with my tax dollars unless we all get piece of the pie. I'm tired of paying taxes for other's to get rich. So much for my stimulus check if this bailout gets approved.

September 23, 2008 at 3:14 pm

Wendy Newberry

I think any bailout is a big mistake! Everything in history has a bottom and if they bailout then the "Real Bottom" will never be reached. If they do the bailout what is next and what happens if it doesn't work? The whole country needs a "Wake up call" and get back to basics.

September 23, 2008 at 3:04 pm

Matt Wolover

I'm sick of having to pay increased taxes to fix a problem that was intentionally entered into. The Government pressures lending institution and mortgage companies to lend to unqualified buyers that don't earn enough money to repay the loan. The greedy lenders, both US banks, foreign banks, and taxpayer subsidized Fannie and Freddie packaged this junk up and sold them all over the world as securities even going so far to insure them which tanked insurance companies as well. The borrowers knew they would never get out of the hole with interest only loans and/or 100%+ LTV loans. The lenders knew they would never get paid, that's why they sold the assets while they could. The Government knew if homes didn't continue to appreciate in value, that it would all crash and now that it has, all of the guilty parties expect those of us working and being responsible with our finances to bail this mess out because they got caught in their own web. This wasn't caused by a slow economy, this was caused out of greed by borrowers and lenders (with the help of the Government) perpetrating a fraud on the taxpayers and I'm sick of it. Stew in your own juice!

September 23, 2008 at 2:46 pm

Gary Ford

You said: "The Heart of the Crisis As the housing plunge has yet to find its bottom, the value of mortgage-backed securities has plummeted, triggering $514 bn in writedowns and losses that have left institutions with too little capital to support lending." You may should define "mortgage-backed securities". There hasn't been any plummeting of value in the top-tier mortgage-backed (MBS) securities. Yes, the derivative markets are horrible (CMO's, for example), but the top-tier securities are not plummeting.

September 23, 2008 at 2:42 pm

Susan Palmer

As a capitalist who believes in the free markets, I believe that Wall Street and Co. should take the profits in the good times and take the hits in the bad. As a consumer, I believe in people taking responsibility for themselves. If you don't have a 20% downpayment on a home, you cannot afford to buy "YET"! Yet is the operative word. Our savings in this nation is the lowest in its history and the lowest in the free world. If we can't save, then we cannot buy. As a citizen of this country, I also blame the U.S. Government for total lax in allowing banks to lend like they have this past decade. When credit is free-flowing, the borrowers will be there. There is plenty of blame to go around for everyone! However, a government bailout of the likes going on right now in all sectors of our free-capitalist nation is somewhere we've never gone before. The government now cannot wait to get its grubby, greedy hands over control of these entities. It's a huge power base for them. If this bailout goes through, it will take years to sift through and see with 20/20 hindsight the outcome. But I can all but guarantee it will not be a pretty picture. Picture this: Remember back in 1981 when Chrysler (Lee Ioccoca) borrowed $1billion from the U.S. government to survive?? And the news and all of America was shocked. The good side of that loan was that it was a basic contract, with Chrysler employees agreeing to take a 20% cut in pay. And there was a life to the contract. Chrysler paid back the loan before it was due. NOW: We are talking about ONE THOUSAND TIMES that kind of money. Yes: 1,000 billions = $1trillion. The government has lost all sense as to what the value of even $1.00 is. They have equally lost sense as to what $1billion or $1trillion is. The numbers can boggle the minds of any mathematician or economist. (except those on the hill).

September 23, 2008 at 2:04 pm

Injecting the Cash

What about a different approach (thinking differently than those like Paulson who got the U.S. and themselves into this mess) There is the concept of applying fundamental common sense by bailing out - or injecting relief - directly at those mortgagor who are under foreclosure. Bottoms up approach, rather than the proposed top down approach. The idea: Infuse cash at the mortgagor level and it will a) work its way quickly into the banks, b) give the market more confidence in securitized mortgage equities making them sellable at reasonable discounts to "private" buyers - not the government, c) instantly increase the value of the underlying assets for the loans - the foreclosed homes, and d) boost popular support for the economy leading to increased confidence. Most significantly, the underlying asset - the home - will stabilize or increase immediately in value. A bottom up injection of cash is also a precisely TARGETED approach. A good analogy is like the laser guided bombs the military is so proud of today v. the "traditional" carpet bombing the experts advocated for in Vietnam. This method will cost US (us) much less. Rough calculation: 10m bad mortgages x $300 US subsidy average per month (the difference between what the mortgagor paid monthly during the first year of the loan v the adjusted ARM rate monthly amount that drove the holder into delinquency) to the mortgage company = $3billon per month x 12 = $36billion per year. This is a whole lot less than the $700 billion projected by Paulson for BAILING out the equity package holders. How to do it: a) order mortgage service companies NOW to contact holders of ALL mortgages that are delinquent or in foreclosure that the foreclosure proceedings will cease immediately b) tell the Mortgagor to pay just the amount monthly that was due during the first year of the mortgage - before the ARM adjustments c) the government will pay the difference immediately for 4-6 months, d) order the mortgage service provider to refinance the existing loans back to some acceptable rate 30yr fixed at 6% or 7yr ARM at 4%. (equity holders have been freaking about this idea because they claim that they can not do this once the mortgages are sliced, diced, tranched, and sold in packaged equities but those packages are worth next to nothing on the market now - and doing this will only stabilize and increase the prices. Doling (the "dole" = welfare) our tax dollars directly to the holders of these packages and buying their packages will a) not help the "heart of the matter" - foreclosures, the home owners will continue to suffer and delinquencies will continue to rise and home values will continue to depressed (WSJ reported this week that delinquencies "Climbed back" last month) b) buying the equity packages of mortgages at a higher rate than the market will pay could be just throwing money down a hole - it is a HUGE risk - that is not a laser-guided cash infusion. WSJ Saturday: "The disturbing thing is that mortgage quality is bad and getting worse," said Mark Zandi, chief economist of Moody's Economy.com." There is no one from the group of foreclosed and delinquent mortgagors lobbying Washington. Only those with limos and jets from NYC who are now in their own foreclosure type proceedings because they can not turn those packages into cash. WSJ Today: "Titans of the financial industry are battling to influence the government's financial rescue plan, a package that will create new winners and losers in the sector. Democrats in Congress want a rescue package that benefits homeowners at risk for foreclosure, not just Wall Street. Securities houses don't want executive salary limits for banks that participate in the rescue." I agree that there should be no salary limits - let them figure out on their own - without our money - they have done a fine job deserving of their current salaries up until now. With those salaries and bonuses and solid leadership they don't need our money. What does Warren Buffet recommend?

September 23, 2008 at 1:58 pm

Bill Kirby

personal materialism and son on" should be, personal materialism and so on" in first paragraph

September 23, 2008 at 1:56 pm

Charlie Cottrell

Marxism is a scary thought to consider. I do not agree with the fact that the taxpayers should be responsible for the mess created by Wall Street. What happens if this doesn’t work? Are we in for a second (and probably the last) Great Depression? This goes to show you that the legal system had to be revamped and stricter limitations have to be implemented in order to deter this sort of event from happening again. The previous statement is considering this bail out even works. On a side note, many economists and financial experts continue to claim we are not in a recession. They assert that a recession means the population will start spending less in the economy and begin saving the funds. What they fail to mention is the fact that the so called savings that people would have is being put into the gas tanks and expressed as INFLATION on everything else. How are we not in a recession? That is the question.

September 23, 2008 at 1:50 pm

Bill Kirby

The damage that has been done by wild speculation that has enriched some, damaged the American Dream of home ownership at reasonable prices, allowed the "Pied Pipers" of "take your money out of home equity with the continuing increase in property values to invest in the stock market, other ventures, education for your children, personal materialism, and son on" cannot be turned back! It is too late! Therefore, where do we go from here to stop the panic caused in great part by the deliberate lack of prudence by many of the lenders who are, in my opinion, the root of all of this evil? Well from my simple accounting experience, I don't have the answer nor do I believe anyone else has a satisfactory answer, especially in view of the open ended contract the Fed and the Treasuary are presenting without adequate accountability in assuming liability and disposing of assets of dubious value. It's kind of like the pin has been pulled on the hand-grenade, it's in America's trench and someone had better jump on it or we're all going to die! The best plan I've seen comes from Brian Wesbury, Chief Economist of 1st Trust and as Elizabeth McDonald's Fox News article says, it might be the best way to prevent financial socialism - and from my point of view offer more competent oversight without as much damage to me and my friends, the taxpayers? In ending, I'm sure there are better plans? I sure hope our tardy representatives can find one in passing legislation!

September 23, 2008 at 1:43 pm

TB

why can't the government do this instead of trying to take over the world's finances, it seems like common sense stuff to relax a few rules to allow prices to settle down without investors making a run on every bank. The laws still need to be passed for judges to change mortgages and banks need to take a loss for making the loans to people who can't afford them in the first place. Individuals whom took out interest only loans who are in foreclosure should have to requalify for a fixed rate loan, and the bank should have to take a market write down for the loss to current value. but if the person in forclosure still doesn't qualify for a traditional fixed rate loan for that house, then they have no business keeping it, and that's what they get for trying to keep up with the jones. This should be acceptable punishments for banks and individuals living above their means.

September 23, 2008 at 1:34 pm

Hillbilly #4

I'll settle and pitch in for the losses just cut me a check for the profits

September 23, 2008 at 1:05 pm

Frank

Consumer confidence must be restored to keep the stock market from erasing trillions of dollars in assets and crashing the world market BUT, while Congress, that created this fiasco wants to now place restrictions, why aren't they removing those Congressmen they placed in charge of oversight, who allowed this to happen and why aren't President Clinton and Chairman Greenspan being identified for their roles. I believe that Senator McCain was a sponsor of a bill defeated in 2005 along party lines, that would have prevented this. Until we stop unqualified borrowers from getting mortgage loans, this will not end. That's what created the greed that led to this. Affordable housing was provided to those who could not afford it. Fannie Mae and Freddie Mac knew it, so did Clinton and Greenspan but when Bush, McCain and others tried to intervene, they were out voted. Wall Streed firms packaged securitized mortgages to sell for Fannie, Freddie and others, probably without knowledge of how bad the underlying loans were or how overvalued the real estate was, because Congress allowed the deceit to occur for years - they should be blamed and they should step up and rectify the issue but the problem won't be solved until they change the programs!!!

September 23, 2008 at 1:03 pm

Dave Young

The fundamental question, it appears, is whether to let Wall Street and certain investor entities take a severe hit, or let the Fed (all U.S.taxpayers) take a severe and protracted hit. I vote for the former, and say let`s jealously protect the credit of the Federal Government. If the Fed weakens, we all suffer in the global economy for years to come. If investors in subprime debt take it in the shorts, we will move on. Borrowers in 2009-10 can resort to (if necessary) new goverment backed loan programs with stricter credit standards than before. Let us also remember that there are foreign banks and non-domestic capital that can lend to domestic borrowers to fill the void..... witness Barclays move to shore up Lehman. End.

September 23, 2008 at 12:25 pm

Larry E. Ham

I am totaly against the taxpayers being responsible for the misserable job that Wall Street has made of the market.We should NOT use our money to bail out the Greedy-Stupid-Mongrels on wall street. They made the mess, let them correct it themselves and suffer the consequences, not the taxpayers. Also, I'm totaly against the Fanny Mae & Freddy Mac bailout. They knew they we're making loans that would never be paid and should sink or swim in the cess pool they created. It's time for the government to stop wasting the taxpayers money. I thought these people were supposed to be intelligent enough to do their job but I guess I was too trusting that they would do what was right. They nare all a bunch of CROOKS. I know I'll never hear from anyone , but you at least know how I feel. I would bet, if I were a betting man, that I'm not the only one who feels this way.

September 23, 2008 at 12:05 pm

about this blog

  • Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.

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