Bailout package *passes* house

[davidcurtisjr]

--In reference to the above picture of our national debt--

On the plus side: although we've gained a digit on our national debt calculation in whole numbers, we've also lost a digit in our measurement of the DJIA. Isn't it nice to know our economy has balance?

[Mulu]

Well, those socialist Europeans seem to have come up with a plan to save the world... nationalizing the banks.

Treasury Secretary Henry Paulson was meeting with top Wall Street bankers on Monday in a scramble to finalize a plan to buy bank shares, an about-face from a previous focus on buying bad debt from banks.

British Prime Minister Gordon Brown shifted the world's thinking by proposing to inject new capital into banks to get them lending again.

The United States has since moved closer to the positions of European leaders, who were in Washington over the weekend for meetings of the Group of Seven major economies, the International Monetary Fund and the World Bank.

BROWN PROFILE RISES

Brown also called on world leaders to create a new financial architecture to update the current international economic system, which was set up at a conference in Bretton Woods, New Hampshire, in 1944.

"Sometimes it does take a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed," Brown said in a speech at the London offices of Thomson Reuters.

Britain's bank plan called for 37 billion pounds ($64 billion) of taxpayers' cash to bail out three major banks in a move that would likely make the government their main shareholder.

Germany, France, Italy and other European governments also announced rescue packages totaling hundreds of billions of dollars that were designed to combat the banking crisis, the worst since the Great Depression.

Meh, those Euro socialist elitists don't know anything!

[Grand Fromage]

Glad we're moving from Hoover-style to FDR-style bank bailouts.

[Mulu]

Just a week after announcing that it was absolutely essential for the government to buy up all the toxic mortgages and that no other solution was possible, treasury secretary Henry Paulson has now ditched his plan and is going to (partially) buy the banks. This move effectively nationalizes them. The British government did this over the weekend and it led to a huge stock market rally in Europe. Paulson II caused the Dow Jones index to jump 936 points yesterday, its biggest one-day gain in history. While Paulson will never admit it, the plan to buy the banks was originally proposed by the liberal Democrats. However, he steamrollered them into submission and they voted for his original plan because without it, he said, the sky would fall.

Government ownership of the banks is a hallmark of socialism, of course. Who would have thought that the October surprise was for the Bush administration to come out of the closet and become overt socialists three weeks before a hotly contested election? The reaction of the Republican rank and file is yet to come. No doubt this subject will get a lot of play in tomorrow's third and final presidential debate.

[Veilan]

It's sad how ridiculously dependant on psychology the stock market is. The rallying of the indexes was simply because people somehow think the government is more adequate and responsible in handling it. The fact that real workers who create real wealth have to pay the make-believe-money of stock brokers is simply appalling.

Did I say I was in favour of an exchange rate between stock market money and real money? Well, I am.

[Mulu]

I think this lady should be the next Treasury Secretary.

A decade ago, long before the financial calamity now sweeping the world, the federal government's economic brain trust heard a clarion warning and declared in unison: You're wrong.

The meeting of the President's Working Group on Financial Markets on an April day in 1998 brought together Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt Jr. -- all Wall Street legends, all opponents to varying degrees of tighter regulation of the financial system that had earned them wealth and power.

Their adversary, although also a member of the Working Group, did not belong to their club. Brooksley E. Born, the 57-year-old head of the Commodity Futures Trading Commission, had earned a reputation as a steely, formidable litigator at a high-powered Washington law firm. She had grown used to being the only woman in a room full of men. She didn't like to be pushed around.

Now, in the Treasury Department's stately, wood-paneled conference room, she was being pushed hard.

Greenspan, Rubin and Levitt had reacted with alarm at Born's persistent interest in a fast-growing corner of the financial markets known as derivatives, so called because they derive their value from something else, such as bonds or currency rates. Setting the jargon aside, derivatives are both a cushion and a gamble -- deals that investment companies and banks arrange to manage the risk of their holdings, while trying to turn a profit at the same time.

Unlike the commodity futures regulated by Born's agency, many newer derivatives weren't traded on an exchange, constituting what some traders call the "dark markets." There were now millions of such private contracts, involving many of Wall Street's top firms. But there was no clearinghouse holding collateral to settle a deal gone bad, no transparent records of who was trading what.

Born wanted to shine a light into the dark. She had offered no specific oversight plan, but after months of making noise about the dangers that this enormous market posed to the financial system, she now wanted to open a formal discussion about whether to regulate them -- and if so, how.

Greenspan, Rubin and Levitt were determined to derail her effort. Privately, Rubin had expressed concern about derivatives' unruly growth. But he agreed with Greenspan and Levitt that these newer contracts, often called "swaps," weren't exactly futures. Born's agency did not have legal authority to regulate swaps, the three men believed, and her call for a discussion had real-world consequences: It would cast doubt over the legality of trillions of dollars in existing contracts and create uncertainty over how to operate in the market.

At the April meeting, the trio's message was clear: Back off, Born.

"You're not going to do anything, right?" Rubin asked her after they had laid out their concerns, according to one participant.

Born made no commitment. Some in the room, including Rubin and Greenspan, came away with a sense that she had agreed to cool it, at least until lawyers could confer on the legal issues. But according to her staff, she was neither deterred nor chastened.

Greenspan and Rubin maintained then, as now, that Born was on the wrong track. Greenspan, who left the Fed job in 2006 after an unprecedented three terms, also insists that regulating derivatives would not have averted the present crisis. Yesterday on Capitol Hill, a Senate committee opened hearings specifically on the role of financial derivatives in exacerbating the current crisis. Another hearing on the issue takes place in the House today.

The economic brain trust not only won the argument, it cut off the larger debate. After Born quit in 1999, no one wanted to go where she had already gone, and once the Bush administration arrived in 2001, the push was for less regulation, not more. Voluntary oversight became the favored approach, and even those were accepted grudgingly by Wall Street, if at all.

In private meetings and public speeches, Greenspan also argued a free-market view. Self-regulation, he asserted, would work better than the heavy hand of government: Investors had a natural desire to avoid self-destruction, and that served as the logical and best limit to excessive risk. Besides, derivatives had become a huge U.S. business, and burdensome rules would drive the market overseas.

"We knew it was a big deal [to attempt regulation] but the feeling was that something needed to be done," said Michael Greenberger, Born's director of trading and markets and a witness to the April 1998 standoff at Treasury. "The industry had been fighting regulation for years, and in the meantime, you saw them accumulate a huge amount of stuff and it was already causing dislocations in the economy. The government was being kept blind to it."

The crisis has prompted second thoughts. Goldschmid, the former SEC commissioner and the agency's general counsel under Levitt, looks back at the long history of missed opportunities and sighs: "In hindsight, there's no question that we would have been better off if we had been regulating derivatives -- and had a clearinghouse for it."

[url=hhttp://www.washingtonpost.com/wp-dyn/content/a ... ss/economy]The article continues from there.[/url] It's a very good read.

[ç i p h é r]

Some very interesting footage in CSPAN's video library on Government Sponsored Enterprises:

House Finance Regulation (meeting in 2003 after accounting irregularities were reported at Fannie Mae):
http://www.c-spanarchives.org/library/i ... d=178110-1

Blarney, it ain't no picnic! It's long and boring, but it shows clearly that Republicans in the House Financial Services committee were the ones calling for better GSE regulation to protect the wider financial markets in 2003 while most Democrats in the committee were less than receptive to it.

Q&A with Peter Wallison - I thought this was terrific in explaining the fundamental problems with GSE's and detailing the corruption.
http://www.c-spanarchives.org/library/i ... d=281010-1

Doing a little more digging, here's Wallison's views on the deregulation charge being made:
http://www.aei.org/publications/pubID.2 ... detail.asp

Excerpts from that article:

There has been a great deal of deregulation in our economy over the last 30 years, but none of it has been in the financial sector or has had anything to do with the current crisis. Almost all financial legislation, such as the Federal Deposit Insurance Corp. Improvement Act of 1991, adopted after the savings and loan collapse in the late 1980s, significantly tightened the regulation of banks.

The repeal of portions of the Glass-Steagall Act in 1999--often cited by people who know nothing about that law--has no relevance whatsoever to the financial crisis, with one major exception: it permitted banks to be affiliated with firms that underwrite securities, and thus allowed Bank of America Corp. to acquire Merrill Lynch & Co. and JPMorgan Chase & Co. to buy Bear Stearns Cos. Both transactions saved the government the costs of a rescue and spared the market substantial additional turmoil.

The latter is something Bill Clinton also claimed publicly, btw.

[Mulu]

It was a lack of regulation over new types of instruments kiddo, read the article from the Washington Post above.

Also, Bush pushed for more loans and less regulation for Fannie and Freddie, despite what a handful of House Republicans wanted. I know you keep conveniently forgetting that, but it is a fact.

[ç i p h é r]

Well we already know that mortgage backed securities exacerbated the problem, but you keep losing sight of the underlying causes. It appears to be twofold to me: 1) bad mortgages against which securities were backed and 2) housing bubble driven by easy credit. That poisoned a pool of otherwise "low risk" securities, which A LOT of foreign central banks were exposed to, which is how this has ultimately become a global financial crisis.

I'm sure there are probably a number of different remedies that could have been applied to avert the crisis, but they weren't. One of those remedies would have been BETTER oversight and regulation of Fannie and Freddie to prevent the bad mortgages from getting into the mortgage pool that fed all the derivatives you talk about, but that did not happen either. Why didn't it happen? The usual lobbying, money, power, and corruption that our government is perennially afflicted with. It wasn't just mistakes and/or bad judgment, unfortunately. At least we can toss those guys out. It's a lot harder to change the culture in Washington.

Nevertheless, one thing is increasingly clear. The Democratic talking point about deregulation is bunk and so is blaming Republicans for the crisis. As a party, they have at least equal share of the blame.

As regards Bush, it's probably a legitimate criticism. His brand of conservatism gives conservatism a bad name. Spend, baby, spend. And there's no sign of any sanity being restored any time soon.

[Mulu]

Well we already know that mortgage backed securities exacerbated the problem

Mortgage backed securities *are* the problem. Without that it's just 200 billion in shaky home loans. The Fed could buy those outright, for a small fraction of the cost of the bailout, and with no effect on the stock market.

Both parties, and US citizens living beyond their means, are also to blame, but that doesn't mean regulations are bad. If anything, it seems to be a rather strong verdict that regulations and oversight are necessary. Again, Brooksley E. Born raised the red flag 10 years ago.... Yes, during the Clinton administration, with a Republican Congress and of course Mr. Bubble himself Chairman of the Federal Reserve Alan Greenspan claiming that the financial markets could regulate themselves.

Greenspan admitted that the housing bubble was “fundamentally engendered by the decline in real long-term interest rates.” In other words, he is in large part to blame. Greenspan's policies of adjusting interest rates to historic lows strongly contributed to a housing bubble in the US. The Federal Reserve acknowledges the connection between lower interest rates, higher home values, and the increased liquidity the higher home values bring to the overall economy.

So yes, it was Clinton's fault. It was Bush's fault. It was Fannie and Freddie. It was Wall Street greed and fraud. It was house flippers. It was developers. It was unscrupulous lenders. It was Greenspan. It was deregulation. It was lack of regulation and collateral. It was the "dark market" of exotic securities not traded on any exchange, and therefore avoiding all oversight and regulation. It was a mentality that the free market can do no wrong and should be allowed to regulate itself. It was lobbyists on both sides of the aisle, and the lawmakers who were complicit in their agendas, including Obama and McCain.

Maybe it isn't fair that the Republican party is taking the full brunt of the blame for this one given the diffusion of guilt... but I'll take it.

(Waits for Cipher's head to explode)

Still, Republicans are certainly the most at fault, given that they had the chance to avert the disaster. In the law it's called the "Last Chance Doctrine." Bush and the GOP were in charge of the Federal Government unilaterally for 6 years, the entirety of the housing bubble. They did nothing to prevent this crisis, despite numerous warnings from multiple people, including fiscally conservative members of their own party. They had the chance to avoid the disaster, instead they threw fuel on the fire. Let them burn.

[mxlm]

Best. Debate. Ever. It helps if you know that Raines is black.

[Mulu]

That was a beautiful find.

It should seriously be reprinted on the front page of every newspaper in America. Talk about being owned. And seriously, a writer for the National Review getting owned by a writer for Rolling Stone on credit default swaps? It doesn't get any better than that.

[ç i p h é r]

So yes, it was Clinton's fault. It was Bush's fault. It was Fannie and Freddie. It was Wall Street greed and fraud. It was house flippers. It was developers. It was unscrupulous lenders. It was Greenspan. It was deregulation. It was lack of regulation and collateral. It was the "dark market" of exotic securities not traded on any exchange, and therefore avoiding all oversight and regulation. It was a mentality that the free market can do no wrong and should be allowed to regulate itself. It was lobbyists on both sides of the aisle, and the lawmakers who were complicit in their agendas, including Obama and McCain.

Maybe it isn't fair that the Republican party is taking the full brunt of the blame for this one given the diffusion of guilt... but I'll take it.

Did hell just freeze over?

On a related note, about damn time. Now why isn't Raines being investigated!?!

[fluffmonster]

it was lack of transparency that led to this getting truly out of hand. you two want to pin blame properly, that's where you need to go.

personally, i blame greenspan. he should have known better.

[Mulu]

If I had to pick just one person I'd blame Greenspan as well, though it's not like he did this all by himself.