Upper management hates them, but every organization needs a worrywart – a skeptical realist. You can spend months or years planning something big and new that will transform the business into the biggest success of all time, but someone needs to ask hard questions. Have you thought of this, and what about that? And what if something goes wrong – a vendor doesn’t deliver a key component on time, or a certain subcontractor is just blowing smoke and their piece of the puzzle turns out to be crap?
But you know what to do. You assign the skeptical realist his or her appropriate section of the project plan – risk assessment and mitigation strategies, pages and pages of tables you hope you’ll never have to consult. The task matches the personality-type. And of course that sort of busywork will keep the staff gloom-and-doom specialist so completely occupied that he or she will have no time to sit in on planning meetings, bringing everyone down and sucking all the enthusiasm out of the room. You can meet with that person offline – privately.
But you don’t do that – you are an optimistic go-getter yourself, and you don’t need to have your own enthusiasm subtlety undermined by doubts, however well-founded. You hide.
And here we are, on Sunday, September 21, 2008, as the Secretary of the Treasury has asked for the biggest financial bailout in United States history – at least seven hundred billion dollars to use as he sees fit, no strings attached. And this must be approved by congress now – otherwise life as we know it will end, or at least we’ll be in a fix far worse than even the Great Depression, and be there in a matter of days. No skeptics allowed – this needs to be done now. Risk assessment and mitigation strategies are nice and all that – but there is no time for such things this time. The sky is falling.
Will this fix things? Will the markets stabilize, seeing that something will be done, and that congress, being told there really is no alternative, will obviously pass whatever is proposed? That would be nice – businesses could once again borrow money for expansion or new equipment, or just to meet payroll if cash-flow issues come up, or to maintain inventory. Things would unclog. The day-to-day of buying and selling, and of people having jobs that might not disappear in a puff of smoke, would continue. Life would go on. Housing price may continue to tank – and obviously will – and the price of everything may continue to rise. But life as we know it will go on, even if times are still hard.
So Sunday night you look for signs that things are looking up, and the Asian markets are already open. Ah, the Nikkei and Hang Seng are up sharply. But are they leading or trailing indicators? They might be waiting to see how things go here. So you consult the US futures tables – and the futures are down. The markets here will open considerably lower. Many are still worried – that the plan won’t pass, or that getting the plan passed will take too many days, or that maybe the plan is nonsense and really won’t fix the underlying problems. It could be any of these things, from cynical realism to mild to severe panic. Monday could be a wild ride. The whole week could be a wild ride, or the whole month.
And then things keep changing:
The Federal Reserve said Sunday it had granted a request by the country’s last two major investment banks – Goldman Sachs and Morgan Stanley – to change their status to bank holding companies.
The Fed announced that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.
The change continued the biggest restructuring on Wall Street since the Great Depression.
And that is the end of independent investment banking in America – dead and gone. Bear-Stearns and Lehman Brothers are gone, and Merrill-Lynch now a subsidiary Bank of America – a depository bank with actual, real assets (those lovely deposits), and not paper promises based on other paper promises. The two remaining investment banks can stop looking for a partner, some depository bank that will buy them up and make them safe. They will become depository banks themselves. So the era of pure speculation far removed from actual assets comes to a close. It must have not been such a good idea in the first place. Look where it got us. And it is nice to know you can now own an investment instrument at least vaguely tired to something of actual value. Considerate it a return to something like comfort.
This was a surprise, but it has a ring of post facto inevitability. It had to happen.
But how will the markets, the collective voice of the masses in some odd way, react?
Before that big news, the press was in a holding pattern, reporting little. The Associated Press ran a collection of anecdotes:
A financial crisis being described as the worst since the Great Depression has left investors thinking far beyond the realm of whether it’s time to buy or sell.
No matter how close they are to retirement, many are considering getting out of the stock market entirely by shifting to cash or even gold, believing the market is so shaky they’re willing to take the potential tax and inflation erosion they’ll suffer from a quick pullout.
Others are staying in, even after this year’s 14 percent decline to date in the Dow Jones industrial average has eaten away at what they had thought were safe portfolios.
The remainder is tales of people not knowing what to do, leaning one way or the other.
And the AP also ran an alarming backgrounder:
The stock market plummets, investors pull out money and loans dry up, triggering global financial turmoil. Enter the government, buying up bad mortgages and other problem assets.
This scenario from the 1930s sounds eerily current, in part because the Bush administration is taking pages from the playbooks Herbert Hoover and Franklin D. Roosevelt used to unfreeze credit and keep Americans from losing their homes three-quarters of a century ago.
From the Great Depression to the Chrysler bailout in 1979 to the savings and loan crisis that cost taxpayers $125 billion in the 1990s, the current administration has many government interventions from which to learn. If the history of previous bailouts holds any single lesson, however, it’s that the outcomes are unpredictable and the problems will take years to work out.
Like we wanted to be reminded of Herbert Hoover? And there was this nugget:
A student of the Depression, Federal Reserve Chairman Ben Bernanke well knows that the government’s slowness to step in following the Crash of 1929 is often blamed for contributing to what turned out to be a full decade of economic misery. By the time the government took comprehensive action, unemployment was 25 percent, much of the steel business had disappeared, and thousands of homeowners a week were losing their houses to banks.
The Hoover administration created the Reconstruction Finance Corp. in 1932 to spur economic activity by first lending money to financial, industrial and agricultural institutions, then injecting capital into thousands of banks by investing in their preferred stock.
That didn’t work – and Hoover was thrown out of office, although not literally, in the Czech tradition. But the idea seems to be, that if history is any guide, something has to be done, and done fast.
Rick, the News Guy in Atlanta, and a frequent contributor here, was worried:
It’s scary to think this whole thing has not been solved after all. We may actually find ourselves once again trusting that others know the unknowable better than we do, and will consequently do the right thing. Sort of like trusting that the people who need to know such things will do the right thing based on their certain knowledge that Iraq has WMD. And if that itself doesn’t scare us, we need to know that the crowd that is working on this is a committee of the whole comprised of the United States Congress in concert with the George W. Bush administration.
But I still do wonder if the market will drop tomorrow. When it goes through these sudden moves up and down, they tend to alternate every other day or so, maybe for no other reason than it dropped so much yesterday, there must be bargains out there – and then it gets so high, there must be much that’s being overvalued out there. (Not that I personally act on any of this; we have a guy who watches all this stuff for us, who works on commission – so when we do well, he does well.)
In Monday’s case, I’m wondering if we’re not going to see the “Palin Effect” in this new RTC — that is, lots of excitement at first, followed after a few days of getting used to the idea, by furrowed brows and worried glances right and left. (At least I hope that’s what’s happening with Palin.) After all, despite this granular “all investing is local” theory, I still think what tends to drive markets up and down is what big investors think that other big investors are thinking.
Hold your breath.
That’s good advice – but you pass out. And the sudden jumps in the market that Rick describes could well be what traders call a classic dead-cat bounce – drop a dead cat from a great height and it will indeed bounce, but it’s still a dead cat – nothing has changed in the fundamentals, after all. As for the granular “all investing is local” theory, see this.
But there is a sense something is fishy here – see the ABC News survey of that disease, Dimensions of Bailout Spark Fierce Debate.
Or see the noted attorney Glenn Greenwald with this:
Can anyone point to any discussion of what the implications are for having the Federal Government seize control of the largest and most powerful insurance company in the country, as well as virtually the entire mortgage industry and other key swaths of financial services? Haven’t we heard all these years that national health care was an extremely risky and dangerous undertaking because of what happens when the Federal Government gets too involved in an industry? What happened in the last month dwarfs all of that by many magnitudes.
The Treasury Secretary is dictating to these companies how they should be run and who should run them. The Federal Government now controls what were – up until last month – vast private assets. These are extreme – truly radical – changes to how our society functions. Does anyone have any disagreement with any of it or is anyone alarmed by what the consequences are – not the economic consequences but the consequences of so radically changing how things function so fundamentally and so quickly?
And there was other reaction around the web on the proposed bailout plan, like this from Yves Smith:
This is a financial coup d’etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse. Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry.
Or the Princeton economist Paul Krugman:
… there’s no quid pro quo here – nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.
I hope I’m wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work – not try to panic Congress into giving it a blank check. Otherwise, no deal.
And see Henry Blodget:
… the key question is what price the government will pay for those assets. This will determine how much (if any) capital the banks need to raise to offset the losses and, thus, what their stocks are currently worth.
Or see Felix Salmon:
American taxpayers will have new obligations: in order to buy those bonds, the government is going to have to borrow hundreds of billions of dollars. That’s new debt, and government debt. But there’s no government guarantee on anything. And if you own a CDO or some other mortgage obligation, the government is definitively not going to step in and make sure you get paid in full.
Barack Obama has called the proposal “a concept with a staggering price tag, not a plan”, and has laid out the principles that he thinks should govern a bailout here. John McCain was rather noncommittal on the administration’s proposal, but criticized Obama – someone should rage about payouts to CEO’s and such, as the common man, like him, is angry at fat cats. (For your amusement, see this – the McCain family owns thirteen cars – including “three 2000 NEV Gem electric vehicles, which are bubble-shaped cars popular in retirement communities.” Obama owns one car.)
There seems to be a growing consensus that if the American taxpayers are going to give Henry Paulson a blank check to bail out a bunch of investment banks, then the American taxpayers ought to get a piece of the action in return. The new rule that lets investment banks turn into depository banks complicates that – but the principle remains the same.
Clinton administration economist Brad DeLong doesn’t like the big bailout at all – it lacks necessary reforms to balance the bailout, no matter who gets a piece of the action.
And in the Washington Post, see Sebastian Mallaby:
Within hours of the Treasury announcement Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans.
… Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. Banks don’t do that on their own because it would signal weakness; if everyone knows the dividend has been canceled because of a government rule, the signaling issue would be removed. Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don’t want to signal weakness and they don’t want to dilute existing shareholders. A government order could cut through these obstacles.
Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks’ bad loans but by buying equity stakes in the banks themselves. Whereas it’s horribly complicated to value bad loans, banks have share prices you can look up in seconds, so government could inject capital into banks quickly and at a fair level. The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.
Congress and the administration may not like the sound of these ideas…. But we are in the midst of a crisis, and it shouldn’t matter how things sound. The Treasury plan outlined on Friday involves vast risks to taxpayers, huge complexity and no guarantee of success. There are better ways forward.
There is no end to the better ideas – but this seems to be no time for risk mitigation and all that. The bold must act to save us all, no matter what the sissies say.
Josh Marshall, on the other hand, suggests it is time to put on the brakes:
I’m quite convinced that some drastic action needs to be taken to avoid a cascading and debilitating series of crises. But the more I look at this plan, the more wrongheaded it seems. But if I’m understanding this deal, the taxpayers are going to pony up close to a trillion dollars to take bad debts off the hands of financial institutions who were foolish enough to make the deals in the first place. And in exchange, I think the tax payers get nothing? Sebastian Mallaby makes the good point that this is radically different than the Savings and Loan Crisis. The RTC which was liquidating the assets of thrifts that had already gone belly up – and paid the ultimate price, as it were. And as the insurer on the accounts, the government inherited the assets anyway. It was just a matter of selling them off. But here the point is to take these bad debts off these companies’ hands so they can go back to being profitable businesses. This is moral hazard on steroids, if I’m understanding this right.
And Marshall points to this in the Wall Street Journal – finance industry lobbyists are already giving orders to Republican hill staffers not to allow any meaningful reforms or protections for taxpayers – just pony up the money, no strings attached:
House Republican staffers met with roughly 15 lobbyists Friday afternoon, whose message to lawmakers was clear: Don’t load the legislation up with provisions not directly related to the crisis, or regulatory measures the industry has long opposed.
“We’re opposed to adding provisions that will affect [or] undermine the deal substantively,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, whose members include the nation’s largest banks, securities firms and insurers.
A deal killer for the group: a proposal that would grant bankruptcy judges new powers to lower the principal, interest rate or both on a mortgage as part of a bankruptcy proceeding.
Yeah, lobbyists – they’re fine folks, making sure we do the right thing. Folks should lose their houses, for being so foolish. Hand out some big campaign contributions and key congressmen will agree.
But Marshall further argues the real issue is the lack of any pricing mechanism:
The key clearly is how much the government pays for these distressed assets. They may be bad debts. But that doesn’t mean they have no value at all. Bought at the right prices and given time on the books – which the government is uniquely in a position to allow them to do – the government could even turn a profit on some of them. But the key is at what price they’re bought and whose get bought. That seems like precisely the kind of process that requires oversight and accountability to make sure the taxpayer doesn’t get fleeced.
… I can’t seem to find any of the people who I respect thinking the bailout plan, as presented, is a good idea.
And one of his readers adds this:
Why do I have the feeling that this bail out of the financial system is going to be the market equivalent of the Patriot Act?
We’re in a crisis which gives the Bush Administration an opportunity to push legislation through Congress with little or no debate. In six months from now, how many “little surprises” are we going to find out about? Gifts to the industry or Bush Administration that got inserted into a bill that was approved without being read – let alone, thoroughly examined – by most members of Congress?
I agree something needs to be done but do we really trust the people that brought us this mess to develop an optimal solution? Our financial markets operated safely and successfully for over half a century under the Glass-Steagall regime. Since we started deregulation, it has been crisis on top of crisis. Democrats should not agree to any bail out that does not include reintroduction of regulatory safeguards and effective oversight. Unfortunately, I have heard almost nothing from them except for Barney Frank. That leads me to conclude that they will be a.) Unprepared to present a plan and/or b.) Unable to articulate it in a way that can win public support.
Glass-Steagall (1933) worked fine – investment banks and depository banks did different things, and one could not, by law, do what the other did. The man who wrote McCain’s economic platform, Phil Gramm, ended that, and tore down the walls between the entities and got rid of all those dumb rules with his Gramm-Leach-Bliley Act (1999) – so there you have it.
McCain was asked if he regretted supporting a 1999 law that removed barriers between investment banks and commercial banks that were erected in 1933, in response to the 1929 stock market crash.
“No,” McCain said. “I think the deregulation was probably helpful to the growth of our economy.”
And from McCain’s platform:
Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.
And there was this clip from ABC’s Sunday morning talks show, “This Week” Roundtable Consensus: McCain Is Clueless On The Economy.
It’s a cold day in hell when the entire “This Week” panel rails against John McCain and his utter confusion when it comes to the economy. Cokie Roberts raises the specter of Herbert Hoover, Donaldson rightfully pins the deregulation racket on McCain and Republicans, calling McCain’s promise to champion regulation a “hard pill to swallow,” and George Will says McCain acted “un-presidential” and that the issue of age should re-enter the debate over whether McCain is fit for the job.
And as for McCain saying executive compensation is the one big issue and many Democrats wanting to add another handout to everyone, another stimulus package, Josh Marshall says this:
I’ll leave to others whom I respect to craft out just what sort of plan is likely to be successful in stabilizing the financial markets and equitable to taxpayers. But any sort of narrow focus on executive compensation strikes me as a load of crap. Yes, they are too high. And yes, I believe they are part of the problem. But I don’t think I need to know too much about economics to know that they are not a significant structural problem in what led to this mess. And the dollars in questions are chump change compared to the bill the big investment houses are now pawning off on the American people.
… My instincts tell me that the effort to pretty this up by adding a ‘stimulus package’ is equally bogus. That’s not to say it’s not important in itself. But if we blow 700 billion or a trillion dollars cleaning up Wall Street’s mess, having also budgeted 25 or 50 billion on helping ordinary people won’t make that trillion dollars any less blown. The focus here needs to be on making sure this bailout makes sense, isn’t going to be farmed out to Neil Bush, and provides something for taxpayers in return. Let’s keep the focus on that.
But Steve Benen says we are being offered a pig without lipstick:
I’ve been trying to find a credible voice on fiscal matters that believes the Bush administration’s bailout is a good idea, and should be approved by Congress without alteration. I can’t find one.
He says that “the plan seems to suffer more as the scrutiny grows more intense,” and he sees the biggest issue is actually the accountability/oversight problem:
The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.
Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world’s largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority.
“He’s asking for a huge amount of power,” said Nouriel Roubini, an economist at New York University. “He’s saying, ‘Trust me, I’m going to do it right if you give me absolute control.’ This is not a monarchy.”
There is this detail – “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.”
That’s in the text, and Benen is not happy:
If we were dealing with a competent, capable administration, which had proven itself reliable in dealing with fiscal and budgetary policy, it would still be an extraordinary gamble to turn over hundreds of billions of dollars with no strings at all. But we’re dealing with the Bush administration, which hasn’t exactly earned the benefit of the doubt.
I can understand the underlying point here. Companies showed some spectacularly bad judgment and bought up some ugly mortgages. To keep those companies from imploding, Paulson wants to use our money to take those mortgages off their hands. If the administration had a plan to buy them up for a song, the approach need not be completely ridiculous, though Paulson has not yet so much as hinted about pricing, or how, exactly, his plan might actually work in practice.
But that’s why some safeguards – you know, checks and balances – seems like it might be helpful in a case like this. As the plan is currently written, not only will oversight be discouraged, it’ll be impossible, by design. Congress is supposed to hand over in upwards of a trillion dollars to Bush’s economic team, and then voluntarily forfeit the right to oversee how the money is spent.
If there’s a good reason to establish this kind of process, it’s hiding well.
See Josh Marshall:
President Bush, through Secretary Paulson, has asked for a massive bailout package with minimal oversight and no protection for taxpayers. Sen. Obama has now come back with a response that while imperfect and insufficient, makes clear that any plan must include independent accountability and oversight, some ability for taxpayers to recoup their investment, and more. Speaker Pelosi is making similar sounds, while congressional Republicans are asking for a “clean’ bill” without oversight or taxpayer protection provisions.
Has John McCain done or said anything so far beside ask for advice from former Sen. Phil Gramm, the guy more singly responsible for creating the mess than anyone else? Which side is he on?
And Marshall asks that we note that the McCain guy, and possibly the man who will replace Paulson in January, Phil Gramm, is both vice chairman of UBS’s US division and a lobbyist for UBS – and that the New York Times reported that “foreign banks, which were initially excluded from the [Wall Street bailout] plan, lobbied successfully over the weekend to be able to sell the toxic American mortgage debt owned by their American units to the Treasury, getting the same treatment as United States banks.” And the Times item added that two of the biggest foreign banks in need of such relief are Barclays and UBS.
Ah – just a coincidence, and Daniel Gros and Stefano Micossi report that European banks are actually worse off than American banks:
The dozen largest European banks have now on average an overall leverage ratio (shareholders equity to total assets) of 35, compared to less than 20 for the largest US banks. But at the same time most large European banks also report regulatory leverage ratios of close to 10. Part of the difference is explained by the fact that the massive in-house investment banking operations of European banks are not subject to any regulatory capital requirement.
… The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mae!) or over 80 % of the GDP of Germany….With banks that have outgrown national regulators and the financing capacities of national treasuries, European central banks and regulators are living on borrowed time. They cannot simply develop “road maps” but must contemplate a worst case scenario.
Yep – everyone is in trouble, even Phil Gramm’s employer.
And as for the big bailout, Bush and Paulson say congress needs to rush and give them a blank check — no time to think about it, change anything, or scrutinize anything.
See Matthew Yglesias:
It seems strange to me that they didn’t bolster their rhetoric by providing congressional leaders with a list of all the times congress and the American people decided to swallow their skepticism and give the Bush administration the benefit of the doubt, and then everything worked out fine. It’s a really long list, so spelling it out in detail would surely convince a lot of people. Like remember when some folks said Bush’s math was wrong and his tax cuts would lead to large deficits? Idiots! Or those who warned that occupying Iraq might be kind of hard? Morons! If you can’t trust George W. Bush with an unlimited grant of authority, then who can you trust?
Well, one congressman, an an anonymous email obtained by Open Left, is not that trusting:
Paulsen and congressional Republicans, or the few that will actually vote for this (most will be unwilling to take responsibility for the consequences of their policies), have said that there can’t be any “add-ons,” or addition provisions. Fuck that. I don’t really want to trigger a worldwide depression (that’s not hyperbole, that’s a distinct possibility), but I’m not voting for a blank check for $700 billion for those motherfuckers.
Nancy said she wanted to include the second “stimulus” package that the Bush Administration and congressional Republicans have blocked. I don’t want to trade a $700 billion dollar giveaway to the most unsympathetic human beings on the planet for a few fucking bridges. I want reforms of the industry, and I want it to be as punitive as possible.
Pure anger is rare, isn’t it? But one reader at Talking Points Memo says people have been too nice:
You would never know it from watching the news, but one of the candidates in this race happens to have been previously implicated in a national scandal involving pressuring regulators to back off of a bank making risky moves with its assets, leading to disaster for investors and an expensive government bailout.
Is there a good reason why no one is mentioning John McCain’s Keating Five membership in any of these arguments over who is on the side of regulating risky private banking practices?
I know that McCain sort of asked for our forgiveness or something at some point during his “maverick period” around 2000-2003, but since he wants to engage in a debate about who is on the side of government regulation of risky banking practices, I think maybe we’re allowed to call him out on this issue. Does anyone believe that if Barack Obama were one of the Keating Five that the Republicans would for some reason hold back from mentioning that fact?
It doesn’t matter – the markets will go way up, or way down. As they say in marketing, or somewhere, Vox Populii, Vox Dei – the voice of the people is the voice of God.