Yes, It’s Scary…But the NO Vote Was Probably Right. Here’s Why

Defeating the bailout package was a BIG gamble. But passing it was, I think, a bigger gamble. After reading conflicting opinions by economists and commentators long after I should have gotten to bed last night, I found that the prospect of what seemed to be an almost certain passage of the 110-page bailout plan…..filled me with dread.

So of the two possible rolls of the dice, I was secretly hoping for the one labeled: BACK TO THE DRAWING BOARD.

As everyone said, there was much improved about the extra 107 pages (over the original three pages offered by Paulson). But it wasn’t enough to justify the risk that no one really wanted to talk about.

Yes, after that not-so-lucky triple seven drop of the Dow, a part of my brain is shrieking: You idiot! Retirement account? What retirement account!!!

Still (my inner Paulson notwithstanding) David Corn’s post, written before the vote, reflects my view likely better than I can:

(Chapeau tip to commenter reg for flagging the Corn post.)

For my money, the $700 billion bailout plan is being rushed through Congress with too much haste. There’s been little debate of the plan’s basics and not much consideration of alternative approaches to the administration’s preferred choice: buying up the bad paper of Big Finance firms that screwed up royally. Yet few in Washington–including John McCain and Barack Obama–want to go out on a limb. Any politician who stands up to Wall Street and opposes this thing has to fear being blamed should the plan not go through and the financial meltdown worsen. In politics, there’s safety in numbers. So if everyone jumps aboard and this plan doesn’t work out, nobody stands to lose politically. It’s the safe political play: get on the train with everyone else.

But there are some legislators who are saying, slow down. House Republicans tried to put on the brakes last week. But their alternative–cut taxes–was a non sequitur. On the Democratic side, Representative Brad Sherman has pulled together a Skeptics Caucus. He drew 30 or so House Democrats to meetings on the weekend.

Then Corn goes on to post the entirety of what Sherman had to say about why he favored a NO vote. Sherman, by the way, is a mild-mannered California Congressman from the San Fernando Valley (with offices a few miles from me), whose mother always used to give out plastic hair combs at her balding son’s campaign events.

I’ve posted the whole thing below. It’s worth the read.

BIZARRE RANDOM NOTE: It’s been almost impossible to get on any Congressperson’s website today. At first I thought it was my WiFi, which has been acting up on me. It’s not. It’s the whole .GOV system. Evidently the natives are definitely restless. (That would be you, me and the rest of the ordinary folks across the country.)

Here’s Brad:

Million Dollar a Month Salaries
Tens of Billions to the Bank of China

The Troubling Secrets of the Bailout Bill

It is widely known that the Bailout Bill does not provide any source of revenue to pay for its enormous cost. It is equally well known that the Bailout Bill will not modify our bankruptcy laws in any way or provide any mechanism by which the terms of a mortgage can be changed without the consent of the owner of the mortgage. The purpose of this article is to outline other troubling provisions.

Stop the Panic. We do not have to pass a bad bill on Sunday. The last two sections of this article demonstrate that the sky will not fall if we don’t pass a bad bill Sunday night.

Hundreds of Billions Will Be Used to Buy Toxic Assets Currently Held by Foreign Investors

Under the Bill, the Administration can buy any toxic asset from any U.S.-headquartered financial institution for any price. Some think that only U.S. investors will be bailed out.

Major foreign investors have already been assured that they can benefit from the bailout. Under the Bill, the Bank of China can sell a portfolio of toxic assets to a U.S.-headquartered investment bank on Monday, and that investment bank can then sell those same assets to the Treasury on Tuesday. The foreign financial press indicates that foreign investors are sure that they will get at least tens of billions of dollars.

The Bill should contain a provision stating that the Treasury can buy only assets proven to be held by an American investor on September 20, 2008. This provision has been rejected by the Administration, the same Administration that has promised foreign investors that they too will be bailed out.

While the transparency provisions of the Bill are generally good, they do not require disclosure of how long the seller of a toxic asset owned it or from whom they purchased it. Accordingly, if the Treasury buys a package of toxic assets from a U.S. investment bank for $20 billion, the amount paid and the nature of the assets purchased will be disclosed–but the fact that those same assets had been owned by the Bank of China just two days prior, will not be disclosed.

Million Dollar a Month Salaries Will Continue

The Bill contains limits on the use of certain esoteric formulas to compute executive bonuses at bailed-out banks. It has some limits on golden parachute contracts for departing executives. It provides that certain executives who benefited from fraud may lose those benefits in the event that such fraud is proven in court.

The Bill clearly allows the payment of regular, plain vanilla salaries to executives of bailed-out firms in any amount. Million-dollar a month salaries will continue. And any executive who feels that his bonus is too low is free to ask his firm for a multi-million dollar increase in base salary.

The President stated that “taxpayer dollars will not be used” to pay enormous compensation to Wall Street executives. The President’s words were chosen carefully. Bailed-out banks are free to use all their other assets to pay million-dollar a month salaries and to use the bailout money to pay all their other expenses.

Five Member Oversight Board Includes 3 Bush Appointees

Much has been discussed about the Financial Stability Oversight Board provided by the Bill. The five member Board consists of 3 Bush appointees, one person jointly appointed by the Speaker and Senate Majority Leader, and one jointly appointed by the House Minority Leader and the Senate Minority Leader.

Few if Any Homeowners Will Get Mortgage Relief

As you know, the Bill will not contain any provision allowing the terms of a mortgage to be changed without the consent of all the investors who own the mortgage. However, we are told that by investing $700 billion in toxic assets the federal government will be in a position to provide reasonable loan modifications to the homeowners whose mortgages it buys.

As well detailed in a document from the Center for Responsible Lending , few homeowners will benefit from this provision. This is because the Treasury will chiefly purchase mortgage-backed securities which will make the federal government one of several co-owners of millions of mortgages. Whether or not any mortgages modified will be determined by the loan servicer acting on behalf of all the various investors who own a piece of the mortgage. That is why Section 108(d) states in part “The Secretary shall request loan servicers servicing the mortgage loans to avoid preventable foreclosures… [Emphasis added.]” Congress has already requested all loan servicers nationwide to avoid preventable foreclosures, so an additional request from the Treasury is unlikely to change current behavior.

All $700 Billion Can Be “Invested” Before January 20

The Bill provides that after the first $250 billion is spent President Bush needs to sign a letter to get the next $100 billion. Some therefore believe that the President is only receiving $350 billion that he can expend now, and the rest depends on Congressional action.

The Bill provides that the second half of the $700 billion can be spent unless Congress passes a resolution of disapproval within a short period. Such a resolution would have to pass the House and then the Senate and would then be vetoed. Then the veto would have to be overridden by both the House and the Senate. Unless the resolution clears all these hurdles, the President is free to spend the second half of the $700 billion.

The fact that such a resolution of disapproval is given fast-track procedures simply means that the inevitable veto and the inevitable failure to override that veto will happen quickly.

Paulson has said that he doesn’t expect to spend more than $50 billion per month. Paulson clearly could spend the entire $700 billion by January 20th. The Merrill Lynch $50 billion sale took place in roughly two days–and both parties were negotiating hard for the best deal. Paulson’s announced purpose is to pay generously for the toxic assets held by Wall Street firms, to help those firms prosper–so negotiations should be even quicker.

This Administration has a history of using to the hilt every authority granted by Congress. The Administration has threatened to veto any Bill which contains a provision which would prevent them from spending the full $700 billion by January 20th.

Taxpayers will get little or no equity upside–and will probably overpay for what they do get.

Section 112(d) of the Bill states that whenever the Treasury purchases toxic assets, it must also receive, as part of the deal, at least some warrants or senior debt instruments. However, a couple of dozen small warrants or a tiny senior debt instrument fully fulfills this statutory requirement. It is totally up to the Treasury to decide whether the price being paid for a combination of toxic assets and warrants is appropriate.

In the AIG deal, the taxpayers received 80% of the company. In contrast, Paulson did not want any warrants to be received under this bailout program. He is being dragged kicking and screaming into a provision that requires him to get some warrants, but allows him to get as few as he wishes.

Meaningful Regulatory Reform and Corporate Governance Reform Will be Subject to Filibuster in the 111th Congress/Bill Contains No Applicable Fast-track Provision

We are promised that next year we will pass the legislation to make sure that this travesty does not repeat itself. We are promised strong, tough legislation that Wall Street has traditionally hated dealing with regulatory reform and corporate governance reform.

Any tough regulatory reform or corporate governance reform proposed in the 111th Congress will be subject to regular Senate rules. Wall Street may not be able to defeat good reform–instead, they will delay, and then dilute. It will take only 41 senators to insist on delaying any legislation until it is diluted. This Bill makes sure that Wall Street has the liquidity necessary to hire 4100 lobbyists.

We Have Time To Improve the Bill

It is in the interest of Wall Street to cause us to panic and pass bad legislation.

No one can say for certain whether our economy will be better off next year if we pass the Bill, or if we defeat it. Only by avoiding a panic vote Sunday, can we write a good bill next week.

The White House declared that the sky would fall if we did not pass a bill by last Wednesday. They also said they would veto a bill with significant controls on the Administration, or on the salaries of executives of bailed-out firms. If not for Administration interference, we would have passed a good bill already.

Last Thursday night, there was a precipitous decline in the likelihood that Congress would immediately rubber-stamp Bush’s proposal. On Friday morning, there was not a precipitous drop in the markets. Most stock markets went up Friday, indicating that investors would buy equity in the American economy even if the Bill stalled. It is, however, true that the stock price of a few investment banks depends on passing the bill immediately. We can and we should take a few days to get this right.

We have time to consider bankruptcy reform, revenue to pay for part of the Bill’s cost, and other improvements.

Experts Say: Congress Should Not Panic

“We ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action.” — 400 eminent Professors of Economics, organized by Professor John Cochrane (University of Chicago). September 25, 2008

“There is a kind of suggestion in the Paulson proposal that if only we provide enough money to financial markets, this problem will disappear. But that does nothing to address the fundamental problem of bleeding foreclosures and holes in the balance sheets of banks.” — Joseph Stiglitz (Nobel Laureate, Columbia University). September 26, 2008

“I totally disagree that this needs to be done this week. It’s more important to get it right.” — Alan Blinder (Princeton University).

“I have doubts that the $700 billion bailout if enacted, would work.” — William M. Isaac, (Former Chairman, Federal Deposit Insurance Corporation).