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TheGarcipian (33.76)

Bailout: The Real Cart/Horse Issue



October 02, 2008 – Comments (10) | RELATED TICKERS: FNMA , FMCC , AIG

Imagine you had $100,000. Yippee! Before you head out to “Party like it’s 1999”, let’s say you’d loaned out some of that money to me, and oh, let’s say you also loaned out some of that money to DemonDoug, Tastylunch, Gtrinvestor, binv, dwot, and other investors (just to randomly pick some popular bloggers & investors that I personally admire). But for reasons we are not fully explaining to you and for which you’ve maybe already guessed, we have failed to pay you back. Furthermore, we refuse to let you see inside our house finances, obfuscating those financial numbers because they’re embarrassing as to how poorly our vision, wisdom, diversification, risk assessment and general business practices were, financially speaking, over these past 8 years. That $100,000 of yours is gone; you may only see a fraction of it in the future.

Now, suddenly, a wealthy relative, say your long lost Uncle Samuel, gives you another $100,000 at extremely favorable terms. How likely are you to loan out any of that new money to me or Tastylunch or the others?

This is how I see the bailout as it currently stands. I’ve been busy with work, so maybe I’ve missed some key elements (pardon my nose to the grindstone then, please), but no one has yet been able to explain to me how a huge influx of our money into a system that’s as constipated as Jabba the Hut in a cheese factory is going to make one iota of a difference if the core issue has not been addressed?

And what is that core issue? It’s trust.

Can someone please explain to me how the trust is going to be restored by this Congressional Act, the trust that has been repeatedly violated over these past 8 years at all levels of this government, from the Office of the Idiot King, through the Justice Department, through a rubber-stamping Congress, down through a Finance Industry with its CEOs & their banking lobbyists all drinking madly the liquor of quick-buck shady deals, ignorant or brazenly complicit to the hazards with which they’d saddled the rest of us?  (Nero, dear fellow, stop fiddling and put down those matches!)

I understand Congress will take up the issue of regulation in another session (hopefully, very soon!) and not forget about it. And I understand they are trying to get the funds out there to help thaw the credit freeze. But when Bernanke and/or Paulson went forward anyway with a plan to release $620B to the global markets just ahead of Monday’s House vote (that failed), it should make you ask yourself three questions:

(1) Don’t Hank & Ben have to wait for Congress’ approval (or was this a forgone conclusion)?

(2) If not, then what the hell is Congress voting on if the Inflation Twins don’t have to wait for the purse to be ordered open? (This should concern you gravely, but that's another whole blog entry...)

(3) Most importantly, why hasn’t that influx of $620B (nearly the full amount Congress had originally been arguing over) made a single iota of a difference to the markets here in the USA and around the world?

Academically, it would be nice to know the answer to the first two questions (if you know, please educate me). But, as others have pointed out in their CAPS blogs, the bailout package will probably not have any effect on the market, as was just proved on Monday with the early release of that $620B (the market's reaction to be sinking 300+ points even before the House vote was started and closingd out the day 777 points down, all told).

What I’m pointing out here is that no matter how many $100k bills your “rich uncle” gives you, you personally are not going to be willing to lend any of that money until some lending practices are corrected. To that end, has anyone given the ideas of Karl Denninger a good mental workout?  I don’t understand enough of the derivatives market to know if what he says is true or even if it will work. But it’s certainly a heck of a lot cheaper alternative!

As I suspected last week when Congress & the President (in a rare moment) agreed to push/rush this thing through, it’s more because of international pressures, as Denninger points out in his Sept.30th blog entry here, not for your & my benefit (well, not directly anyway). There is some wisdom in providing those Europeans, Japanese and Chinese who’ve bought our crap mortgage paper an escape by buying them out of those positions, in that it restores some faith in the USA as a whole (thanks Finance Industry for tarnishing that, BTW) and helps stave off a rush to cash-in a lot of the Treasury notes they hold. That would be pandemically bad for us all. But at what point do we draw the line, choosing between a very very bad choice and an absolutely horrible one? Do you choose to load yourself with massive debt, bloating the federal budget by a quantam-leap of 25%, and paying taxes on that debt for the rest of your life, or do you choose to risk extinguishing the faith in the already-weak US dollar and the promises that capitalism is still an excellent export because we don’t allow unfettered deregulation to swallow our markets and financial integrity? Rather bluntly, do you choose to shoot your mother or your father?

For now, it doesn’t matter because (to me) it seems as if the government is putting the cart before the horse. In short, we may live up to our motto: “In God We Trust”.  But between us mortals, we need Trust spelled out on paper, and certainly before we hand out any money.

Finally, I understand we’ve got to be careful here, for we only get one shot (really) at fixing this. While trying to cure the cancer into which we’ve been led, we’ve got to be careful to not kill the patient. It’d be like winning the battle but losing the war. I don’t fully understand the credit crunch, and I certainly don’t want to see our financial system (and the rest of the world’s finance) constipated like a cheese-engorged Jabba the Hut. That wouldn’t be good for any of us. But handing out money without the “trust” part figured out is a sure recipe for more failure.

Call or write your Congressmen today, now, here:
And here:
And express your concerns.

10 Comments – Post Your Own

#1) On October 02, 2008 at 8:22 AM, Gemini846 (34.75) wrote:

You are correct. Currently putting 700B into these bankers hands with no accountablility is like getting diagnosed w/ stage 4 cancer and drinking Mona Vie.

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#2) On October 02, 2008 at 9:12 AM, rd80 (96.69) wrote:


The Fed already had the authority to issue those loans.  Section 13(3) of the Federal Reserve Act gives the Fed authority to do make pretty much any loan they want in "unusual and exigent circumstances" as long as five of the board members agree; the rules are whatever five Fed Governors say they are.  Looks like that 'purse has been open' since 1932.

Buying the paper should be a little more effective than a Fed loan since it's a permanent chunk of cash, but you still need the banks to make the loan.  

I included your third question in my e-mails to my Congressman and Senators and recommended they ask it when debating the bill.  I've also sent it to a few to some of the CNBC shows. 

Someone, anyone, please ask Paulson, Dodd, Frank, McCain, Obama, other congresscritters, your special guests - any of them - If the banks won't lend the Fed's money, why do we think they'll lend Treasury's?

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#3) On October 02, 2008 at 1:47 PM, TheGarcipian (33.76) wrote:

rd80, thanks for that explanation. It clears up some of my ignorance of the situation. In fact, your last line is the question that frames all this mess so beautifully. Thanks for stating so eloquently in one line what it took me several paragraphs to say.

The newest version of "Hanke-Panke-Bernanke Plan" (or just "Hanke-Panke" for short), as it is now being called online, has some new holes, namely lots of additional pork, including (and I kid you not), "$6M for producers of wooden arrows" and "$128M for auto racing". And damn it all if Alaska, home of the Earmark King, Senator Ted Stevens, didn't pull down another "$223M for Alaskan fisherman". (See the link above). Hey, didn't we already give $233M to Alaska for a Bridge To Nowhere that was never built, yet the funds were never returned? Let's let Sarah Palin and her lies about "Thanks, but no thanks" sweep that bridge money into the fisherman's pockets, not give her still more pork! Something stinks up there, and it ain't the fish...

So, we have a new plan, yet the Hanke-Panke Plan is still heading in the wrong direction. According to this History of Bailouts report, the Fed is doing something good in acting quickly, but they should be recapitalizing the banks, not buying their crap assets. Again, I contend the subtext is given from the rest of the world crying to buy them out of their bad paper. Apparently, these foreigners want to be a part of the free market system, except when they lose money. That report puts forth the model choices that Norway, Sweden and Korea used to quickly end their financial crises, and not the Japanese one, which caused their markets to wither for 15 years and counting. "Three years after the bailout, stock markets were higher and inflation lower," denotes the report. It will be a painful road, no doubt, but giving out money this way without addressing the core underlying problems is an ill-suited fix, IMO.

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#4) On October 02, 2008 at 11:47 PM, rd80 (96.69) wrote:

Gar - Glad to be of help.  Lest anyone think I'm smart, I learned about the Fed Reserve Act authority when I was ranting on another forum about no constitutional authority for the Fed loan to AIG and someone pointed out that I was wrong and sent me to the source.  Note - still not sure that provision of the Federal Reserve Act is constitutional, so I might not have been wrong. But I have trouble reading penumbras and such.  

I've been a McCain supporter and have been very disappointed in him through this.  After saying he would name names and make the porkers famous in the debate, he's missed a golden opportunity here.  The senators who sponsored the 'wooden arrows for kids' tax break, the rum producers break, the film production add ons, auto racing and the other non-relevant stuff in this bill need to be made famous and held accountable to the voters for these give-aways.  The US Senate thinks NASCAR needs taxpayer help?  I like NASCAR, but give me a break.  

I know this was wrapped in to an existing bill for procedural reasons, but arrows, rum, auto racing and films?  If those are the most important things the Senate has to deal with, fire all 100 of them and save us their paychecks and op expenses.

I know we've disagreed on some issues, but nice to be on the same side with you and many other Fools on the bailout.  Our politicians could learn a lot about disagreeing without being disagreeable if they spent a little time here. 

Gnarly Head Old Vine Zin is pretty decent stuff and makes blogging more fun :) 

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#5) On October 02, 2008 at 11:51 PM, Tastylunch (28.61) wrote:

I knew I shouldn't have used that money the proverbial "you" gave me to play Craps in Vegas! Can "you" float me another 100 large? I just know I can get it back at the Track, my luck is bound to change!

C'mon bail me out Uncle Sam, the Chinese are going to break my legs if you don't!.....

 Nobody has been able to explain to you how it will work Gar, because it won't work at least not the way it's written :-(  To make matters worse the gov't is probably going to vastly overpay for these assets as their is no clause in there that limits how they spend it at all.

answers (best guess)

1) no apparently they don't have to.

2) well they are voting on whether to buy the banks bad assets or not, that is a bit different than floating somebody a bank a loan.  The Fed I think has free reign over money supply issues but not issues of what the US itself actually owns...that's the treasury's territory I think. The reason they needed a congressional vote I think is to give Paulson powers to do this unsupervised (basically he gets dictatorship powers over the financial system under this plan as far as I can tell, no congressional oversight or approval, no mandatory disclosures, no budget limit.....)


Gar I do think some intervention is probably necessary but like you I don't think this bailout solves the problem. Like you said Trust is the issue here. in 1907 JP Morgan locked all the banks in a  room and forced everyone to turn their books over to him so that there was complete transparency. He then decided who would continue to function and who would not. Now that may not be practical today but the basic goal of forced transparency should be, we need these banks to fully disclose everything, and I mean everything ( level 3 assets, MBS, CDS, CDO, SIVS) , they have so we can finally get some Price discovery on these toxic assets going on. The only way we can restore confidence is for some of these banks to think they have a way to get rich.

Then if need be the gov't can recapitalize the survivors by buying equity. As loathe as I am to have the fed gov't own individual stocks I think that's about the only way we won't get screwed and will help the banks. Getting rid of bad paper won't help the banks, they need liquidity, recapitalization looks to me to be the unfortunate only path available for that :-(

Haha thanks for the kind words, I've admired your approach since I first noticed you here on CAPS. You, Gtrinvestor, dwot, madcowmonkey and Everydayinvestor are some of the players who have helped me get a lot better especially when I first started playing.I've invested since I was a teen, but It's amazing how much you can learn when you are forced to see how you do versus others.

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#6) On October 03, 2008 at 5:51 PM, TheGarcipian (33.76) wrote:

Thanks rd80 and Tastylunch for your responses. I too am sickened by the additional damage the Senate caused by loading even more pork into an already overladen debt which will consume 25% of our national budget. That is deeply unforgiveable from my viewpoint. Yet it is darkly ironic that the Senate felt it had to "win over" those House Republicans by offering more pork than you could shake a moose at, just so they'd play ball and pass this massive debt onto us all. It all comes down to money, not principles. Period. When the money comes to my state or my pet project, it's not called "pork". Gimme a break. I don't want to hear any politician (and specifically any Republican politician) ever say they're opposed to earmarks and pork-barrel politics, not after the stunt the Senate pulled. If those House Republicans (and lo, some Democrats too) wanted to continue standing all hoidy-toidy above us, decrying how they'll shut off earmarks & such pork, then they had their chance to stand on principles. And they blew it. Never again should anyone (who's been paying attention to this political screwing) ever believe a politician when they rail against pork-barrel politics.

On a lighter note, I think Stephen Colbert got this whole bailout predicament just perfect in his Formidable Opponent skit this week. Enjoy!

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#7) On October 03, 2008 at 11:35 PM, FleaBagger (27.34) wrote:

Good article. I'm not sure our esteemed rulers care much what we have to say, though.

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#8) On October 04, 2008 at 5:15 PM, TheGarcipian (33.76) wrote:

Thanks, Flea.

Because I strive to be fair to both sides and call it as I see it, I must note that I stand corrected on one point. I was under the impression that a good many House Republicans switched their votes after the extra pork was added to the Senate version of the bailout. It turns out not as many as I'd suspected swapped sides but a slightly higher number of Democrats did switch their votes.

Initially, here's the breakdown total from the "first-version" Sept. 29th House vote:
FOR -- Dems = 140, Repubs = 65;
AGAINST -- Dems = 95, Repubs = 133;
(NOTE: In the above link, the bill is called something different than in the Oct.3rd vote, but as several sites can attest, like this one from CNN, the vote is as I have it above)

By contrast, here's the final breakdown total from the Oct.3rd vote in the House:
FOR -- Dems = 172, Repubs = 91;
AGAINST -- Dems = 63, Repubs = 108;

So, while 25 Repubs switched from AGAINST to FOR after the pork got in, 32 Dems did the same. Like I wrote in the previous entry, so much for integrity and standing on principles. Shame on both parties for passing this pork-laden bill!

And for those of you keeping score at home, you'll note I did, just now, something McCain had promised to do last week but still hasn't: "publish the names of the earmark pork-barrel voters in Congress and make them famous" or something like that. (And I doubt he ever will). Follow the above links to see who voted FOR and who voted AGAINST this porker.

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#9) On October 11, 2008 at 12:04 PM, dwot (29.45) wrote:

Excellent post gar.

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#10) On October 18, 2008 at 1:15 AM, TheGarcipian (33.76) wrote:

Thanks, D!

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