Again, no one knows. Not $700 billion--that's the amount we're paying for distressed assets, some of which will yield profits. The entire portfolio of fire sale securities may lose money, but it's unlikely to be anything close to the entire amount.
In some sense, the reason to do the bailout is that we don't know. I don't want to give money to GM because I have a pretty good notion of the scale of a GM collapse. Some people will lose their jobs and get new ones, the steel industry will take a hit, and a lot of managers will be looking for another line of work than pushing ugly, underperforming cars. On the other hand, I have no idea how far a bank collapse might spread. And I'm really not eager to find out.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
Again, no one knows. Not $700 billion--that's the amount we're paying for distressed assets, some of which will yield profits.
Megan: I'm personally hoping the outlay may be less than $700 billion. This is why for me equity is the deal breaker. If firms have to pay for assistance with equity, presumably they'll think twice before accepting more assistance than they really need. Who knows, maybe we'll find out that the country's financial institutions "merely" require, say, $500 billion in capital.
You're getting pretty interventionist these days, Miss McArdle! Actually, though, that's a good sign. Ideas are heartless things, and I don't think this is the moment to go all Robespierre and insist that we follow our ideas out to their (gulp) logical conclusion. I don't know what to do, either, and if Hank Paulson and Warren Buffett tell me it's a good idea, I'm just going to have to swallow and press the "I believe" button.
On the other hand, I bet the rate of return is better than anything the MacArthur "genius grants" produce.
But then, I suppose I'm just bitter that they passed me over. Again.
Megan,
Are you familiar with the FHA Secure Program?
I wrote about it here
http://www.searchlightcrusade.net/2008/02/the_fha_secure_program.html
several months ago.
By expanding this program - eliminating the Loan to Value restriction of 97% - I think we'd do a lot more good for a lot less money than anything else. Leave all the other qualification requirements in place, but the big problem is people with short term teaser rates (or payments) whose loans have now reached the end of the teaser period, who cannot afford the new payments, and are prevented from refinancing by the fact that they are upside down (Owe more than the property is worth). Remove that problem, and a lot of people could qualify to refinance.
Those who could qualify would then not be forced into short sales or foreclosure, contributing to flooding the market (supply of property) at a time when demand is low and the loan market is difficult.
This would have the effect of limiting the short term price deflation, further limiting financial losses.
Based upon what I'm seeing (Realtor and Loan Officer), I think that would solve at least half the housing problem at a very minimal cost. Levy the lenders whose bad debt is subsumed by FHA Secure to pay for the cost to the government.
Ouch. I'd hardly call the Cadillac CTS, Chevy Malbu or Buick Enclave "ugly" or "underperforming."
We also don't know in $700 billion is the total outlay or just a first step. Nor do we know if there's going to be a significant bank collapse anyway, after we've spent a large fraction of a trillion dollars trying to avert it.
Hey Tom -- wait till GM can't afford to fund warranty work. Then tell me how they perform.
And does anyone here think those cars are beautiful?
I share Mike's doubts. The more I look at it, the less likely it seems to me that the "bail-out" can do much to prevent some inevitable collapses. And if it only postpones it, what's the next shrill alarm to come next month?
Listen, I'm not all that attached to any particular companies out there. If a boatload of old standard names go belly up, someone will swoop in and sweep up the pieces at bargain basement prices and take it from there.
All of this fear-mongering in favor of "Do something! Do anything! NOW!" seems too extreme. Especially since it's all about hocking the savings of the rest of us for those who played the housing market like a casino. I mean, what gives? Mortgages requiring zero down payments? Borrowing on terms like those is nothing more than gambling.
The punditocracy and politicians are begging us to Act Now While Supplies Last! Our political masters would possibly have greater credibility if they didn't sound like a late-night Ronco infomercial...
I had an interesting conversation with a Korean journalist a few weeks back. His question was, "With so many bad things happening in the industry and economy, why don't you give up."
I asked him, as politely as I could, what did Korea do after being devastated by the war? His answer was quick and confident: "We picked ourselves up and rebuilt."
I expect you would get the same answer in Germany, or Japan, or China, or Russia -- "We picked ourselves up and started to rebuild."
It is interesting to see how many people outside of GM seem to have lost heart. Is a viable U.S.-based auto industry so trivial that it should be surrendered without a fight? Should a company like GM be any less dogged than a war ravaged nation like Korea? We don't think so.
We at GM are focused on finishing our restructuring in the U.S., despite some pretty serious headwinds, and continuing our successful growth in China, Russia, Brazil and other fast growing economies. We may have made some mistakes in the past, but we are fighting our way back and we are here to stay.
That's an inspiring story Tom, and I hope GM does arise, phoenix-like from the ashes of financial statements past. That said, you've got no darned right to demand taxpayers to pay for it. So yeah, start to rebuild, but don't forget the first part of the answer and pick YOURSELF up from the dirt and get on with it. I don't owe a thing to GM.
That said, you've got no darned right to demand taxpayers to pay for it.
GM has as much right to demand taxpayer money as the boys on Wall Street. We as taxpayers and voters have a right to say "no." Sadly, it's obvious we're not going to exercise that right.
lol @ Tom's attempt to equate GM with all American manufacturing for the rest of history.
Like they always say, GM is a marketing company that makes cars on the side. Honda spends money on making cars better, GM spends money on more deceptively rooking people into buying their latest garbage.
some of which will yield profits
WILL yield profits?? That sort of certainty is very misguided. Some of which may yield profits is defensible and likely even. Will yield some return is certain. Will yield profit is based on hope and/or a misunderstanding of what we're dealing with here, both in terms of the subject assets and the likely purchase price.
I think you really have to set aside the quality of GM's products in order to understand why they're in such a pickle.
Regardless of how good a given GM product is, their pension and benefit obligations are so substantial that they often have to make around $2000 more per car than a competing Asian firm in order to turn a profit. This has a feedback-effect of reducing available capital to fund new R&D, and ultimately results in inferior products. The severity of this problem was probably somewhat masked by the popularity of high-profit American SUVs and light trucks over the last ten years.
American auto manufacturers will probably be able to compete in the future, but only after they liquidate their union labor force. As it stands they're fighting with one arm tied behind their back.
Ouch. I'd hardly call the Cadillac CTS, Chevy Malbu or Buick Enclave "ugly" or "underperforming."
I like the Cadillac CTS.
The Chevy Malibu is not per se ugly, but it's hardly inspiring either. At best, it's beer-goggling.
The Buick Enclave - wow another crossover. 2001 called, it wants it cutting edge back.
There isn't a real difference between GM failing and WaMu and some others. There are over 5400 banks in this country.
If the 40 or so that are knee deep in CDOs, CDS, etc go under, their competitors will fill whatever need the tottering ones have served. These competitors can ramp up quickly because the Fed lends them money and has tons unlent.
Like any turmoil, people are harmed. But people are harmed when imbecilic party leadership impounds $700,000,000,000 and distributes.
I'd hardly call the Cadillac CTS, Chevy Malbu or Buick Enclave "ugly" or "underperforming."
I maintain a special affection for the early '90's Lumina. For a few brief days in high school, I entertained the vain hope that a beautiful girl I met stepping out of one would call me.
It should make me bitter, but I prefer to accentuate the positive.
Shorter Megan: If it's my friends' industry, or and industry that I understand and sympathize with, then we should bailout. Else, Fuck'em!
The collapse of the auto industry effects more than just a a lot of managers. It would be alot more engineers and workers than managers. Come to the Midwest sometime.
Make mine a CTS-V. The revised grill, 6-speed manual, and detuned Corvette engine fix the only things that are wrong with that car.
CTS-V, malibu, sky/solstice, Lucerne super,the coming Camaro.
There is some nice stuff there. Good looking, high performance stuff. Maybe not your cup o tea Megan, but big picture, I'd rather loose Morgan Stanley and Goldamn than GM any day
Shame they discontinued the monte carlo.
The CTS is a lovely car.
Megan,
I have read many essays today claiming that the feds could eventually reap a profit of up to 1.2 trillion on this deal if it passes and is implemented in a way such that the impaired assets are purchased at deep discounts. If this turns out to be true, doesn't this really mean that we would have weakened the banking system in the long run?
I'm still not convinced on the need for a bailout. Isn't one of the functions of the Fed to provide loans to banks in need of reserves? Isn't that why they have a discount window? What about the TAF and TSLF programs the Fed setup, are the banks even using them? Its seems not.
Also, the underlying problem is the sluggish economy. The only way to correct that is to increase aggregate demand. And the only way to do that is to either cut taxes (how about the payroll tax), or increase government spending. Swapping assets between the banks the treasury won't accomplish this.
Should GM learn how to make the paint stay on their products, I'd be happy to consider purchasing them again. This means I'll have to wait until the new Malibu has about 5 years in service before I consider changing my mind.
Sorry, Tom.
By expanding this program - eliminating the Loan to Value restriction of 97% - I think we'd do a lot more good for a lot less money than anything else.
This is wrong, there has been "zero down loans" for FHA for a long time. Let me explain how this works, a person gets qualified for an FHA loan but they can't afford a 3.5% down payment. So the seller "donates" money to a housing "charity" and this "charity" gives this money to the buyer. The amount the seller gives is 3.5% + fees. It's essentially laundering money through the "charity", and the "charity" takes a cut for laundering the money. This is called a down payment assistance program. It ended up being banned in the last housing bill (still not effective btw), but Barney Frank is trying to bring it back. The IRS has stated that they may revoke these "charities" tax exempt status because they don't really receive gifts. I'm not convinced that zero down loans are the answer, considering they aren't helping now.
Unfortunately, borrowers who use these down payment assistance programs have 3X the failure rate versus buyers who don't. Essentially, people who can't save a paltry 3.5% down payment up are not good credit risks for hundreds of thousands of dollars.
Again, no one knows. Not $700 billion--that's the amount we're paying for distressed assets, some of which will yield profits.
I'd also like to correct Ms McArdle on this point, because it isn't limited to purchasing $700B worth of securities. What the bill allows is for the Treasury to HOLD UP TO $700B of securities. If the Treasury purchases $700B, sells for $350B and repeats a few times, all of the sudden the losses are well in excess of $700B dollars.
I know that the newspaper and talking heads on TV have frequently gotten this wrong, but this speaks more to problems with our journalistic standards than anything.
megan has already made so many great points regarding all this.. all I can add is that the question is not only "how much will it cost" but "how much will it cost in relations to other expenses or investments?" this is the internet age - money can be moved via scripts etc but that is another story...
so many memetic forces come together. the crisis short-selling issue, the deregulation of the financial industries, complex derivatives, human nature, the bail-outs and now more potential de-deregulations ...
I am, still, a big fan of the Gramm-Leach-Bliley Act. Yet the whole system plays out differently in different geographies and regulatory systems?
do you subsidize a system only when it is in need (like now in the US) or constantly as in Europe (Deutsche Bank receives subsidies every day even though there is no crisis - and so do German home owners via social security - and so do
all farmers in the West).
From an economic point of view it is usually better to bail out from time to time although it feels psychologically worse than supporting otherwise rich firms (Deutsche Bank) and rich populations (Germans) constantly.
It is a bit like medicine - even those who eat healthy and exercise can get sick or lazy. do you take an aspirin, a bit of antibiotics and anti-depressants as a precaution daily and constantly or not?
Or do you take medicine only as needed (bailout) despite the
fact that it might prolong a real recovery? Or do you take no medicine at all - not even when needed?
Under the current case I think it makes sense to take the medicine as we would lose a lot of money in the short/mid-term if a mission critical organ (banking) went slow for a while. More money than the bail out would cost?
(I do not care that I was not part of the problem, that some bad guys might get away and that there is no justice, and that pedagogically speaking the wrong conditioning takes place.... because today I want my business to go on as usual tomorrow even more than all this other things).
However - from an pedagogical point of view, and parents know this, rewarding mismanagement by always helping out is not ideal. Letting the children perish is however also not an option.
So - chances are that some from of regulations and conditions will follow. "We will help you out this time but... you have to do this and that from now on..."
But what? It is not the job of the Government to manage risks for lenders and borrowers. 50% own-capital-requirements for loans like in Italy is NOT going to fly in the US and really does not make sense that much if you can get a 2nd and 3rd mortgage on the mortgage anyway...
something will have to give... either no bailouts and no regulations so that free agents can get hurt and become more careful themselves - or regulations and ongoing support? Right now - it is neither nor and due to politics it will remain a mish-mash... a mish-mash that Western economies can actually afford.
What we cannot afford is an ecological bankruptcy which would send food and water prices through the roof permanently. When nature breaks down because we have consumed more than can grow back - no tax bail-out will help. All this is distracting from the real long-term threat.
The US alone has recently spend $1,5 trillion for a
preventive^2 culture-war, has passed a dirty/godly-down-to-earth-$250-billion-farm-bill and is now bailing out chalk-stripe-banks for $700 billion.
Once this crisis is over we will again be discussing education (so that we learn how to consume even more) and health care (so that we stay alive longer while consuming more and more).
And yet - a $50 billion clean energy bill that has been discussed in Congress for almost a decade now is perceived as too expensive, bad policy or useless...
this, I believe, is where the real problem lies... these are the frightening aspects regarding our awareness, prioritization, long-term thinking and preventive acting.
currently - farmers and food consumers around the world are dancing to the same song that lenders and borrowers have been mastering. species extinction, soil erosion... if money prices and exchange rates represent approximations of some perceived value - then the currency in question here is not perceived...
republicans: enough nanny-interventions and government tax money wasted.. more tax cuts - more freedom.. surveillance over regulations..
democrats: your deregulations and own interventions and wars brought us into this mess... tax the rich and the world will be better off... we need universal education and health care... regulations over surveillance
nature:stop... or I will stop!
Megan,
No one can calculate the cost because no one can guess what price the Treasury will pay for very doubtful securities. With the Paulson plan as introduced, the answer you ask for is obtained by first guessing that unguessable number and then adding another guess for the additional losses of one sort or another we can expect the Treasury to be suckered into.
The good news is that Lucian Bebchuk of Harvard has figured out amendmants to the Paulson plan which might make it workable; and reasonably effective and efficient. Freakonomics has it.
Like the first poster, I think we need equity as part of the stick. (See Sweden's 90s bailout of its banks after their housing bubble burst.)
And we need to incorporate Frank's principle that if you're too big to fail, you're too big to be in business. Otherwise we just encourage the biggest institutions to take bigger risks than the smaller ones, secure in the knowledge that the house will always cover their losses, but not those of the guys small enough to fail. Relatedly, there should be regulation that will make what banks hold to back the assets transparent--it's ridiculous that no one has a clue what these investments are worth--and not a promise that they might get to it next year.
Beyond those two principles, I'd prefer that no one at a failing investment bank get a bonus this year--suck it up people, anyone who keeps their job is lucky and those of us putting in $10,000 per family don't want it all going to your bonus. And that we not bail out the perpetually sinking US auto industry, even if it is better for swingstate MI votes. And that we laugh at the idea of eliminating the capital gains tax on the principle that then everyone will put the money into saving all the investment banks.
Megan how about our bailout of Mexico, Chrysler, etc....didn't they all yield profits in the end?
I'd also like to correct Ms McArdle on this point, because it isn't limited to purchasing $700B worth of securities. What the bill allows is for the Treasury to HOLD UP TO $700B of securities. If the Treasury purchases $700B, sells for $350B and repeats a few times, all of the sudden the losses are well in excess of $700B dollars.
Jordan: You're wrong on this one. I know the draft legislation that was produced seems to suggest that, but Paulson has said that wasn't his intent and it wouldn't be in the final version.
Megan,
I have a question I am hoping you can help me with. I have seen many people complain "I can't believe my taxes are going to bail out Wall Street."
Given the size of the US debt, isn't it more accurate to complain that foreign investors, or at the very least, my great grandchildren's tax dollars will be paying for the actual bail out?
I ask because I am genuinely unsure where the actual money will be coming from.
So, pour l'instant, the Congress can't agree on what to do. So, what else is new? The market didn't tank, so what does that mean? Probably that the market doesn't care what Congress does. If they want to diddle around, it will mean lost jobs and pain for employees, and it would mean recession if protracted, but the market is already discounting that to some degree. The banks who survive the mess will be a few really strong ones, BAC, JPM, GS, and they've already been dining on the weak sisters (Burp!, Excuse me). The surviving private banks are declaring that they ain't gonna loan no stinking money to the uncreditworthy anymore...no matter what the Congress wants. If they want affordable home loans, let them loan the money themselves. Ditto on the short-term commercial paper.
The problem is that everyone is talking about a bailout for the financial industry when the problem is the eonomy.
The only real problem people can point to is a credit crisis mainly hitting larger corporations who rely on investment banks for loans.
So, the Fed issues 100 billion in 10 year government notes paying 5 percent. In today's market these will be snapped up. These can be used to make short term loans to large borrowers.
If we believe what we have been told that corporate America is, for the most part, in fine shape the default rate will be low. So the total cost to the tax payer will be the interest over ten years or a total of 50 billion and perhaps one or two defaults. This solves the only real problem anyone has actually pointed to.
Further, during those 10 years the financial industry can get it house in order after the big investment banks are allowed fail. Congress can, over the course of 2 and half presidencies, work out rational legislative changes. And we can all take a good long look at how we got into this mess.
So, please, someone explain to me what 700 billion is supposed to do other than continue the Greenspan/Bernake of bailing out hose who bought bad papep. They are not the economy. The companies who need to borrow from them are and directly helping them is the right thing to do.
Cost is in more than just $$$$, it is also in precedence of the government being a nanny state. It will cause inflation, hurting the poor the most. It will reduce American Freedom. It will lay the foundation for moral hazard. It will balloon the Debt of the Federal Government. It will increase the interest rate on the Federal Debt, because people who buy that debt are not going to want the federal government diluting the value of that money by just printing more and more of it. It will prop up home prices that are still outside the price range of most people who work near the homes.
While I do not know the amount that these things wil happen, but each and every one WILL happen using the Paulson plan.
Here is something else to think about. Barney Frank will have access to every last mortgage, and will do his damned best to make sure people who were irresponsible or even down right nefarious in getting loans for houses get to keep their houses, and likely will reduce their interest rates, maybe even their mortgage balance.
I know the draft legislation that was produced seems to suggest that, but Paulson has said that wasn't his intent
I doubt it was Bush's intent to be in Iraq for 5-years at the cost of a trillion dollars, but the blank check handed to him allowed it to happen. We can only judge what can happen based on the legislation written, not what's in Paulson's head. Do you base your decision on the written contract, or the verbal promise from a salesman? Forgive me if I think that Paulson has a bit of a conflict of interest here considering he's the ex-CEO of Goldman Sachs, and they stand to gain from this bailout.
This is wrong, there has been "zero down loans" for FHA for a long time. Let me explain how this works, a person gets qualified for an FHA loan but they can't afford a 3.5% down payment. So the seller "donates" money to a housing "charity" and this "charity" gives this money to the buyer. The amount the seller gives is 3.5% + fees. It's essentially laundering money through the "charity", and the "charity" takes a cut for laundering the money. This is called a down payment assistance program. It ended up being banned in the last housing bill (still not effective btw), but Barney Frank is trying to bring it back. The IRS has stated that they may revoke these "charities" tax exempt status because they don't really receive gifts. I'm not convinced that zero down loans are the answer, considering they aren't helping now.
As I've mentioned before, I work as an accountant for a homebuilder. I see these FHA loans with down payment assistance through Nehemiah and others on many of our "2 over 2" condo contracts.
As you say, this is merely a left-pocket/right-pocket scenario, but what you don't mention is that for every instance in which the seller "contributes" to the down-payment assistance program, the sales price of the home is increased by that exact amount. So the buyer isn't given the money at all, they are just paying it through mortgage with an increased sales price.
So the buyer isn't given the money at all, they are just paying it through mortgage with an increased sales price.
I understand that, which is why I put the word "charity" in quotes, because it's just a way to add the cost of the down payment onto the loan. Essentially, it's laundering money with a charity front. A seller isn't allowed to gift a down payment to the buyer directly (for the reason you mentioned), but if laundered through a "charity" it's OK.
The big problem is that buyers not being able to come up with a down payment is a sign of poor credit worthiness. I understand that saving thousands of dollars is tough work, but home owners must have the ability to do so. If they can't afford to immediately replace a leaky roof, broken pipe etc. then they go further into debt or the house falls into disrepair and becomes worthless. Home owners need to show that they are responsible enough and have the means to not live paycheck to paycheck.
To those who were paying attention at the time we do know what caused this financial mess and it is directly traceable to the Clinton administration. Here is a link to a City Journal article of 2000 warning about just such a possible mess. How can anyone know what this will cost in the end.
http://www.city-journal.org/html/10_1_the_trillion_dollar.html
So now we're all borrowing to pay our mortgages. Brilliant. What's the rate on the loan?
It seems we're going to end up rewarding irresponsibility at the macro and the micro levels. Millions of people who bought houses they couldn't afford and should never have been given loans for are going to get a bail out one way or the other, lower mortgages, debt forgiveness. Thousands of brokers and traders are also going to get a bailout for their irresponsible leveraging of these credit instruments and absolute obliviousness to their risk exposure.
How is this good? Some kind of federal action seems necessary to inject more liquidity into the market, but shouldn't the little and the big guys pay some price for being so irresponsible?
One should note with interest how little discussion there has been of who will ultimately get the money and what they will be allowed to do with it. Hank Paulson, after all, will simply be a transaction agent sending the money off to someone. As Redford and Newman once asked as they looked behind them, who are those people?
To this point there is no discussion of putting constraints on how the money is used. So we can logically assume that we will be giving this money to the people who didn't have either a clue or prudential judgment the first time around. So we should expect that, absent specific guidance and restrictions, they will continue to try to square the circle and make gold from dross, leaving us to clean up the problem again 20 years from now. Why is this a good thing? Shouldn't we be giving the money to people who are prepared to help sort out all the credit squeeze problems that Paulson and Bernancke keep saying are the reason that this has to be done in the first place?
I would like to see some plan that actually puts the money to use in prudent lending. There should be real guidance in this area and real penalties for those who violate it. In fact, I would like the money to go to the many regional and small banks that didn't jump for subprime earnings,of which there are many. They have a track record of how to do it right. As with so many, I would like to see the capital made available to prudent lenders through preferred shares with a real interest rate that allows for risk coverage.
Buying assets,as Paulson and Bernancke would have us do, is like giving liquor to an unreformed drunk. It is just enabling. As was pointed out so many times, buying these assets at the 'long term hold' value just rewards the problem creators and the fast buck artists and the vulture funds. One wonders how many of the graduates of the savings and loan disasters of 20 years ago have ended up creating this round of problems.
Paulson and Bernancke are creating moral hazard. They will not be buying from naive entities. If they are, there should be a requirement that the leadership of these firms go find another line of work. To date there is this very disquieting sense that many of the people who were let go at Bear Stearns or Lehman for helping to cause the problem are finding work again within the industry. There is no requirement that the sellers use up all of their capital before they sell or that they be limited in what they do with the money. So why wouldn't people just do again what they've always done?
yes aaron
we are borrowing to pay our mortgages
people took out mortgages they could not afford, banks kept/securitized the mortgages and now there is too much of this mortgage paper - it is "sucking all the oxygen out of the room" in the financial world
the way to make it go away is to let many of the loans default and prices fall, but if - at the end of the process - too many banks and households are wiped out then the market will have corrected in a too brutal way
hence the government sitting on the stuff until things improve
Hey, hey, I like GM cars. In fact with the exception of Chrysler the American cars are very good and yes some of them are beautiful. I know foreign car snobs are essentially the same as MAC snobs, and I accept that. But I have had both Volkswagen and Toyota lemons and believe me, even the foreign cars made in America are expen$ive buggers to fix.