Guest
09-21-2008, 10:31 PM
While some of you may have been lining up to see Governor Palin, there were a couple of excellent interviews on the Sunday news shows (Meet The Press and Face The Nation) this morning with Henry Paulson, as well as Barney Frank and Senator Richard Shelby. The legislators are the respective chairmen of the House and Senate Banking and Finance Committees. Never was there a more clearcut example of the difference between someone who knew what he was talking about and elected people with a political agenda.
Paulson explained the immediate need for a large amount of bailout money to be provided to the Fed with very few strings and conditions. He explained that the need was immediate in order to stabilize the debt markets and avoid serious damage to the U.S. and world economy. He admitted that the request was distasteful, but better than the result if nothing was done. He said that the bailout funds were needed immediuately and there was no time to debate various limitations and amendments that members of Congress might like to see added. Shelby, at least, was fairly senatorial and thoughtful about his responsibility in satisfying this request. Barney Frank acted like a jerk, I thought. He wanted to tack stuff onto the bill like a $100 billion economic stimulus package and some limitations on executive compensation. Pretty clearly, Frank is going to hold Paulson's request hostage in order to get the extraneous things he wants tacked onto the bill. Talk about not being able to separate the fly**** from the pepper. Remember, it is Frank's committee that is supposed to provide oversight to U.S. banks and financial institutions.
To be fair, Frank's committee has no jurisdiction over the investment banks that failed--they are unregulated businesses.The same is true of Freddie and Fannie--the Congress itself has the responsibilty to regulate those two firms, which they refused to do with much intramural arguing and posturing for many years with the results we now all sadly know.
On Face The Nation, Bob Schieffer was the first journalist that I've heard address the issue of how we're going to pay for this huge bill. In the context of the presidential candidates who are running around and telling the voters who's going to cut taxes by how much, Schieffer asked Paulson whether in fact it would be necessary to raise taxes in order to pay for this huge expenditure. (By the way, I was wrong in my earlier post on another thread when I said that this bailout represents the same cost as one year of the Iraq War. I was really wrong. This bailout represents more than the cost of the entire Iraq War from it's beginnings in 2002.)
Paulson answered Schieffer's question like a person who had only a few months left before he'd be going out of office. First he said that the money would be used to buy up non-performing blocks of bad loans from banks which could later be traded and/or re-sold, with any proceeds coming back to the Treasury. He avoided any estimate of how much might come back to the Treasury, if anything at all. He distinguished between this plan and other government spending bills, like the earlier bailout of Bear Stearns, which was simply an expenditure of taxpayer funds to shore up a failing investment bank. But he did artfully dodge the question, admitting that the bailout plan would have a dramatic effect on the federal deficit and would effect the ability of our government to borrow money which would have to be dealt with by Congress in order to maintain the financial stability and fund the operation of the U.S. government.
Also, you may not gave picked up on the fact that the only two remaining investment banks, Goldman Sachs and Morgan Stanley were given the status of full-fledged commercial banks today. What this does is permit both firms to perform as commercial banks, but it also brings them under the regulatory authority of the Federal Reserve. Until now they have been unregulated and not subject to any regulation. While the referenced Wall Street Journal article doesn't say it, I'd be willing to bet that this is a classification that neither firm asked for or wanted. My guess is that both firms are threatened by their exposure to bad loans, but probably not mortally threatened as was Lehman, Merrill Lynch and Bear Stearns before them. I'd guess that they approached the Fed for some financial assistance and were told that they'd get it from the bailout plan, but only if they agreed to become subject to government regulation. I think this is really a good thing because it brings the last two major financial firms that could enter into businesses and transactions taking as much risk as they wanted to under the regulatory thumb of the Fed. The people that the bankers will be required to deal with from the Fed will certainly not be as smart as they are, will act in a deliberate manner, and will cause the bankers all kinds of frustrations while limiting risks they might otherwise want to take. This is a good thing in my opinion.
I think this move involving the only to remaining independent investment banks effectively brings the business of investment banking to an end along with the creation and trading of exotic financial instruments, unfettered risk-taking and the the payment of offensive amounts of money to everyone from partners down to junior investment bankers just out of college. The new classification of the two firms as well as Lehman, Merrill Lynch and Bear Stearns before them creates some very stringent capital requirements that will require the diversion of money which had been paid to partners and employees to the balance sheets of the firms as amounts capital required based on the riskyness of the businesses they want to be in. If any of the firms are not profitable enough to divert funds to satisfy regulatory capital requirements, they will simply have to dramatically cut back practicing the businesses deemed so risky as to require such capital retention. Here's the brief article...http://online.wsj.com/article/SB122204751200261685.html?mod=testMod
Everyone interviewed today admitted that the proposed bailout is a stopgap measure and may not be enough. They also admitted that it may stem the unsettled capital markets, but that the underlying situation will almost certainly cause a year or two of zero or maybe negative U.S. economic growth. It was explained that as this effect wends its way thru our economy, it will almost certainly result in unexpected declines in corporate earnings and a deepening of the current recession and already serious correction to the equity markets. Sounds like a good time to be in really high quality fixed income securities and cash. The problem will be, of course, that the entire market will try to head in that direction and drive the price of high grade fixed income securities thru the roof, making it too late to effect such a reallocation.
In the meantime, our Presidential candidates are running around criticizing each other's character and telling the public how much they're going to cut taxes. Once the election is over, folks, get ready for reality. Don't accuse the winner of lying--they were both just selectively manipulating their opponent's words for the purpose of getting elected.
What a system!
Paulson explained the immediate need for a large amount of bailout money to be provided to the Fed with very few strings and conditions. He explained that the need was immediate in order to stabilize the debt markets and avoid serious damage to the U.S. and world economy. He admitted that the request was distasteful, but better than the result if nothing was done. He said that the bailout funds were needed immediuately and there was no time to debate various limitations and amendments that members of Congress might like to see added. Shelby, at least, was fairly senatorial and thoughtful about his responsibility in satisfying this request. Barney Frank acted like a jerk, I thought. He wanted to tack stuff onto the bill like a $100 billion economic stimulus package and some limitations on executive compensation. Pretty clearly, Frank is going to hold Paulson's request hostage in order to get the extraneous things he wants tacked onto the bill. Talk about not being able to separate the fly**** from the pepper. Remember, it is Frank's committee that is supposed to provide oversight to U.S. banks and financial institutions.
To be fair, Frank's committee has no jurisdiction over the investment banks that failed--they are unregulated businesses.The same is true of Freddie and Fannie--the Congress itself has the responsibilty to regulate those two firms, which they refused to do with much intramural arguing and posturing for many years with the results we now all sadly know.
On Face The Nation, Bob Schieffer was the first journalist that I've heard address the issue of how we're going to pay for this huge bill. In the context of the presidential candidates who are running around and telling the voters who's going to cut taxes by how much, Schieffer asked Paulson whether in fact it would be necessary to raise taxes in order to pay for this huge expenditure. (By the way, I was wrong in my earlier post on another thread when I said that this bailout represents the same cost as one year of the Iraq War. I was really wrong. This bailout represents more than the cost of the entire Iraq War from it's beginnings in 2002.)
Paulson answered Schieffer's question like a person who had only a few months left before he'd be going out of office. First he said that the money would be used to buy up non-performing blocks of bad loans from banks which could later be traded and/or re-sold, with any proceeds coming back to the Treasury. He avoided any estimate of how much might come back to the Treasury, if anything at all. He distinguished between this plan and other government spending bills, like the earlier bailout of Bear Stearns, which was simply an expenditure of taxpayer funds to shore up a failing investment bank. But he did artfully dodge the question, admitting that the bailout plan would have a dramatic effect on the federal deficit and would effect the ability of our government to borrow money which would have to be dealt with by Congress in order to maintain the financial stability and fund the operation of the U.S. government.
Also, you may not gave picked up on the fact that the only two remaining investment banks, Goldman Sachs and Morgan Stanley were given the status of full-fledged commercial banks today. What this does is permit both firms to perform as commercial banks, but it also brings them under the regulatory authority of the Federal Reserve. Until now they have been unregulated and not subject to any regulation. While the referenced Wall Street Journal article doesn't say it, I'd be willing to bet that this is a classification that neither firm asked for or wanted. My guess is that both firms are threatened by their exposure to bad loans, but probably not mortally threatened as was Lehman, Merrill Lynch and Bear Stearns before them. I'd guess that they approached the Fed for some financial assistance and were told that they'd get it from the bailout plan, but only if they agreed to become subject to government regulation. I think this is really a good thing because it brings the last two major financial firms that could enter into businesses and transactions taking as much risk as they wanted to under the regulatory thumb of the Fed. The people that the bankers will be required to deal with from the Fed will certainly not be as smart as they are, will act in a deliberate manner, and will cause the bankers all kinds of frustrations while limiting risks they might otherwise want to take. This is a good thing in my opinion.
I think this move involving the only to remaining independent investment banks effectively brings the business of investment banking to an end along with the creation and trading of exotic financial instruments, unfettered risk-taking and the the payment of offensive amounts of money to everyone from partners down to junior investment bankers just out of college. The new classification of the two firms as well as Lehman, Merrill Lynch and Bear Stearns before them creates some very stringent capital requirements that will require the diversion of money which had been paid to partners and employees to the balance sheets of the firms as amounts capital required based on the riskyness of the businesses they want to be in. If any of the firms are not profitable enough to divert funds to satisfy regulatory capital requirements, they will simply have to dramatically cut back practicing the businesses deemed so risky as to require such capital retention. Here's the brief article...http://online.wsj.com/article/SB122204751200261685.html?mod=testMod
Everyone interviewed today admitted that the proposed bailout is a stopgap measure and may not be enough. They also admitted that it may stem the unsettled capital markets, but that the underlying situation will almost certainly cause a year or two of zero or maybe negative U.S. economic growth. It was explained that as this effect wends its way thru our economy, it will almost certainly result in unexpected declines in corporate earnings and a deepening of the current recession and already serious correction to the equity markets. Sounds like a good time to be in really high quality fixed income securities and cash. The problem will be, of course, that the entire market will try to head in that direction and drive the price of high grade fixed income securities thru the roof, making it too late to effect such a reallocation.
In the meantime, our Presidential candidates are running around criticizing each other's character and telling the public how much they're going to cut taxes. Once the election is over, folks, get ready for reality. Don't accuse the winner of lying--they were both just selectively manipulating their opponent's words for the purpose of getting elected.
What a system!