The Bailout: Terms of the Debate

A quick couple of observations about the bailout debate:

1. No one is arguing about the method of doing the bailout. The idea of a individualized institution-by-institution bailout seems to be the only idea getting any traction even though it has huge transaction costs and lots of possibilities of conflicts of interest and self-dealing by financial institutions working as agents for the Treasury (see my wholesale bailout proposal through a series of public reverse Dutch auctions here).

2. There isn't a lot of debate about the amount of the bailout. There's been some suggestion that it could cost much more (or less). But no one is proposing only doing a $500BN bailout or a $300BN bailout. Shouldn't we be asking how Treasury got a $700BN figure? I'd like to see their math.

3. Treasury's proposed bailout was the equivalent of asking for a no-covenant loan. I know Paulson's been off the Street for a bit, but perhaps someone should tell him that no one is doing no-covenant or even covenant-lite loans anymore.

4. The Treasury proposal, nicknamed "Authorization to Use Financial Force," seems to be an attempt to put the Powell doctrine of overwhelming force into play in the financial world. But are we sure that it works? Lots of cash poorly deployed doesn't result in victory. If we want to stay with the Iraq war analogy, it might be easy enough to stabilize the market temporarily/topple Saddam's regime, but it scares me that Treasury/Fed seems to have no long-term plan, just as with Iraq. If we're going to go to war, we better be prepared to win the peace.

Comments

[Mike Dillon]

I'm a little partial to "TARP" as CR coined over on Calculated Risk.

http://calculatedrisk.blogspot.com/2008/09/paulson-transcript-troubled-asset.html
Paulson statement on TARP (Troubled Asset Relief Program) (note: the name isn't official, but as I mentioned in the previous thread, the TARP is intended to cover all of Wall Street's sins!)

[caleb Mardini]

Unless I don't understand this correctly the $700,000,000,000 is just the amount available for purchases at any one time.

[Chris Phillips]

Re: point 2, Chuck Schumer has suggested starting with a lower # ($150B).

http://digg.com/politics/SCHUMER_ASKS_PAULSON_WHY_700_BILLION_WHY_NOT_150_BILLION_2

[Mark Krajewski]

Last night I watched President Bush’s national address about the alleged financial crisis we may be facing. I’m unable to share the urgency for spending $700BN because I’ve seen no change in the economy other than some stock values slipping. Each day this week, I have returned home from work to find the usual one or two pre-approved credit card offers in my mail box. And this morning, on the drive into work, I heard two radio commercials from banks offering home equity mortgages.

If our economy is fundamentally strong as the President and others say, and which I tend to agree with based on my observations, then it should not need a bail out. I believe what we are really seeing, is a sector of our financial market that has spun out of control, due to the gambling aspect of stock trading that has taken on a life of its own. This should not be confused with investing. Today, there are many financial products in play that were created for the sole purpose of trading and making money for someone. These exist because we have too much money to invest and we have exhausted the supply of actual and tangible products such as real home mortgages or stocks of viable companies.

There is a side of the Wall Street business that is a house of cards. This card house is collapsing which is probably a good thing. And the question is - what is the impact to the other side of the economy built on tangible investments? I don’t think anyone has that answer and can do no more than speculate. But I’m willing to gamble and see what happens without a taxpayer bailout. If its truly catastrophic, we can return with some type of bailout, but my guess is we’ll see an unemployment spike in the metropolitan NY City area as some investment bankers and stock traders loose their jobs. Really, is this any worse than a couple of car factories closing down? I don’t think so, and my mail man will be pleased with the lighter load he must carry when most of the pre-approved credit card offers dry up. Borrowing from Nancy Reagan, “Just say No”, …to the bailout!