Weiss Research Inc. - Proposed $700 Billion Bailout is Too Little, Too Late to End the Debt Crisis;

[That Guy 888]

... Too Much, Too Soon for the U.S. Bond Market.


Martin D. Weiss, president of Weiss Research, comments: There should be no illusion that the $700 billion estimate proposed by the Administration will be enough to end the crisis. Nor should there be any false hopes that the market for U.S. government securities can absorb the additional burden of a $700 billion bailout without putting major upward pressure on U.S. interest rates, aggravating the very debt crisis that the government is seeking to alleviate. Among its policy recommendations, Weiss urges Congress to:

1. Severely limit the governments authority to buy bad private-sector debts by requiring it to pay strictly fair market value, including a substantial discount that reflects their poor liquidity.

2. Disclose to the public that there are significant risks in the financial system that the government is not able to address.

3. Focus more resources on strengthening existing safety nets, including FDIC insurance of bank deposits, SIPC coverage of brokerage accounts and state guarantee associations that cover insurance policies.



http://news.yahoo.com/s/usnw/20080925/pl_usnw/proposed700_billion_bailout_is_too_little__too_late_to_enddebt_crisis__too_much__too_soon_for_u_s__bond_markets

[orwell]

1. 2&3 make sense...

...one not so much. If they pay a discount to fair market value the banks could already get that if they really wanted. One of the problems is that there is no fair market value as the securities can't trade, and that if even they received fair market value or discounted fair market value the troubled bank would probably become insolvent.

Any plan should include direct purchase of preferred shares by the Government to inject fresh capital into the troubled banks. The equity should be senior to all other capital including existing bondholders.

[That Guy 888]

2. I'm not the economist in my family, my sister is. So this post probably will contain some errors

She is the one who showed my the full white paper that her company distributed to their financial advisers.


The link is to an extract, the full White paper is about 23 pages. In the full version, there are six recommendations to Congress, and 4 policy recommendations. I don't know very much about it, but the most important point to me is that the $700 billion bailout won't end the debt crisis and according to this paper, will cause more economic harm than good.

My sister showed it to me because her opinion was: why should every American taxpayer for years into the future, pay for assets that are if not worthless, then certainly not as valuable as bush, paulson and the rest are trying to sell them to us for. Definitely a pig-in-the-poke. She mentioned something about derivatives (which she felt are bad investments) being packaged together with sub-prime mortgages into "investment products" that were the equivalent of junk-bonds.

Also, the authors of this paper feel that these bad debts are just the tip of a potential 51 trillion dollar iceberg. Any govt intervention has to save what can be saved with the limited funds available.


My sister's analysis: it's a band-aid to maintain the illusion of economic stability until chimpy gets out of office, allowing the 'pukes to blame Obama.

[soothsayer]

3. more than likely it's to cover up the massive fraud in the mortgage markets

By Carolyn Betts, Esq.

I agree with every point in Bernie Sanders’ proposal but have a suggestion.

I worked with lead counsel to the RTC (the government entity that served as receiver for defunct savings & loans) in designing and implementing the sealed bid auction program for non-performing commercial mortgage loans during the S&L crisis. I also worked for FHA’s lead financial advisor in carrying out the Congressional mandate that HUD enter into “negotiated” sales of its nonperforming multifamily loans to state housing finance agencies. Based on what I saw in these contexts and in carrying out sales of pools of VA, Farmers Home and HUD performing and nonperforming single-family loans, both in auctions and in mortgage backed securities form, my conclusion is this: the Wall Street players made out like bandits, ultimately at taxpayer expense and borrowers were not helped.

I suggest we try another tack, in addition to what Congressman Sanders proposes: support the BORROWERS of the troubled loans, not the OWNERS of the loans. I believe there is a good chance that there is collateral and other fraud in these mortgage loan portfolios. I.e., loans with no properties to support them, multiple loans secured by a single property, loans used to launder money through government guarantees. This conclusion is based in part on the numbers, which don’t make sense, and upon observation of the number of HUD-insured loans that have gone into default before a single payment was received. If the lenders are just paid for these loans what is the theoretical value in a good market for these loans, assuming they are performing (i.e., above current market value), the lenders will get a windfall and be rewarded for making fraudulent and/or predatory loans. And the bailout as proposed will be a perfect way to hide the evidence of wrongdoing.

Would it cost anywhere near $700 Billion to have the government stand behind the borrowers’ obligations, in concert with a program to address unemployment/ underemployment and health care issues that are the primary sources of financial problems that cause these loans to go into default? I think not. I would impose a condition that the existing “problem” home loans in portfolio, and maybe also related home equity loans, be marked to decent rates of interest and reamortized over 30 or 35 years, with write-off of penalty interest, late fees, etc., at lender expense. Then, to the extent the borrowers still cannot make their payments but want to stay in their homes, have the government funding program (with a local-level administrator NOT controlled by those who caused the current crisis) make up the difference. Perhaps the government gets a lien on the property for only the amount of the borrower’s shortfall after a period of time during which the health care fix and jobs programs can take effect (say, 18 months).

I agree that the bailout bill will be a disaster, in so many ways I can’t even list them all. Allowing the market to crash, with all its consequences, would be better than giving away $700 billion + to the perps that brought us to the brink of world economic collapse. The longer we keep putting fingers in the dikes to avoid the consequences of bad decisions, money laundering and theft by the corporadoes, the worse the eventual flood will be.
http://solari.com/blog/?p=1605#more-1605

[Joe Chi Minh]

5. Very interesting. Other experts have a similar "take", I believe.

[orwell]

4. I would tend to agree...

...the whole Bush/Paulson plan is seriously flawed.

[chill_wind]

6. K & R n/t

[That Guy 888]

7. New link to full PDF

http://solari.com/blog/docs/Final-Bailout-White-Paper.pdf

I. Too Little, Too Late to End the Debt Crisis. Congress should
1. Disregard data based on the list of troubled banks maintained by the Federal
Deposit Insurance Corporation (FDIC). The FDIC’s list currently has 117
institutions with $78 billion in assets. However, based on a broader analysis of
recent FDIC call report data, we find that institutions at risk of failure include
1,479 FDIC member banks and 158 thrifts with total assets of $3.6 trillion, or
36 times the assets of banks on the FDIC’s list.
2. Think twice before providing a broad bailout for U.S. debts given the wide
diversity of mortgage holders and the great magnitude of the total debts
outstanding in the United States. Just-released Federal Reserve Flow of Funds
data show that, beyond mortgages, there are another $20.4 trillion in privatesector
consumer and corporate debts, plus $2.7 trillion in municipal securities
outstanding.
3. Recognize that, among banks and thrifts with $5 billion or more in assets, there
are 61 banks and 25 thrifts that are heavily exposed to nonperforming
mortgages.
4. Get a better handle on the enormous build-up of derivatives held by U.S.
commercial banks.
5. Base any legislation on (a) realistic estimates of the loan amounts already
delinquent or in default, and (b) reasonable forecasts of how many more are
likely to go bad in a continuing recession.
6. Recognize the inadequacies in already-established safety nets, such as the
FDIC for bank depositors, Securities Investor Protection Corporation (SIPC)
for brokerage customers, and state guarantee associations for insurance
policyholders.
There should be no illusion that the $700 billion estimate proposed by the
Administration will be enough to end the debt crisis. It could very well be just a
drop in the bucket.


II. Too Much, Too Soon for the U.S. Bond Market. There should also be no
illusion that the market for U.S. government securities can absorb the additional
burden of a $700 billion bailout without putting dramatic upward pressure on U.S.
interest rates.
The Office of Management and Budget (OMB) projects the 2009 federal deficit
will rise to $482 billion. But adding the cost of announced and proposed bailouts,
now approximately $1 trillion, it is undeniable that the federal deficit could double
or triple in a short period of time, driving interest rates sharply higher and
aggravating the very debt crisis that the bailout plan seeks to alleviate.
III. Policy Recommendations to Congress
1. Congress should limit and reduce the funds allocated to any bailout as much as
possible, focusing primarily on our recommendation #4 below.
2. If Congress is determined to provide substantial sums to a new government
agency to buy up bad private-sector debts, we recommend that the new agency pay
strictly fair market value for those debts, including a substantial discount that
reflects their poor liquidity.
3. Congress should clearly disclose to the public that there are significant risks in
the financial system that the government is not able to address.
4. Rather than protecting imprudent institutions and speculators, Congress should
protect prudent individuals and savers by strengthening existing safety nets,
including the FDIC for bank deposits, SIPC for brokerage accounts and state
guarantee associations that cover insurance policies.
IV. Recommendations to Savers and Investors
Regardless of what Congress decides, savers and investors should continue to
invest and save prudently, seeking the safest havens for their money, such as
banks with a financial strength rating of B+ or better, U.S. Treasury bills, and
money market funds that invest almost exclusively in short-term U.S. Treasury
securities or equivalent.