Wall Street bailout plan explained, universally reviled [Update 14 It's unanimous]

    And here is the aforementioned analysis by Naked Capitalism.  If you truly want to understand Paulson's Wall Street bailout plan, this is the gold standard.  That the taxpayer gets cleaned out isn't a bug, but a feature of the plan, and Paulson has admitted so behind closed doors:

....
The increase of the request from the initial $500 billion and the release of the shockingly short, sweeping text of the proposed legislation has lead to reactions of consternation among the knowledgeable, but whether this translates into enough popular ire fast enough to restrain this freight train remains to be seen.

First, .... here is the truly offensive section of an overreaching piece of legislation:
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.

This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat, .... Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry.
....
Nouriel Roubini does not think it passes the smell test:
'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.''
....
Now to the substance. The Treasury has been using the formula that it will buy assets at "fair market prices". . ....
Yet as we discussed, the plan makes no sense unless the Orwellian "fair market prices" means "above market prices." The point is not to free up illiquid assets. Illiquid assets (private equity, even the now derided CDOs were never intended to be traded, but pose no problem if they do not need to be marked at a large loss and/or the institution is not at risk of a run). Confirmation of our view came from a reader by e-mail:
I worked at [Wall Street firm you've heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It's supposed to be members only, but there's no way to enforce that if it's a conference call, and you may have already heard from other staff who were listening in.

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won't sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that's because he didn't want to admit that the government would just keep offering more and more.

....  this program is going to swing into action with the clear but not honestly disclosed intent of buying assets at above market prices when future markets and the analysts with the best track records on forecasting this decline (you can add Robert Shiller, CR at Calculated Risk, and Nouriel Roubini to the list) believe it has considerably further to fall.
....
Losses on the paper acquired are guaranteed. This is not a bug but a feature. The whole point of this exercise is an equity infusion to banks. ....

[Additionally,]
Taxpayers have no upside participation.

There is no regulatory reform as part of the package. ....

   U. Cal. Berkeley economics Prof. Brad de Long also begs Congress to turn down this plan:

John McCain chose Sarah Palin to be his vice president.

There is a 40% chance John McCain will be president on January 21, 2009.

There is no way in hell that anybody should give any extra power to any Treasury Secretary chosen by John McCain.

I beg the Democrats in congress: write a bill that makes sense.

    Prof. of Finance Luigi Zingales of the U. of Chicago agrees that the plan "crreate[s] a charitable institution that provides welfare to the rich -- at taxpayer expense" and offers a good alternative:

the solution is Chapter 11. In Chapter 11, companies with a solid underlying business generally swap debt for equity: the old equity holders are wiped out and the old debt claims are transformed into equity claims in the new entity which continues operating with a new capital structure.

Alternatively, the debt holders can agree to cut down the face value of debt, in exchange for some warrants. ..... So why is this well-established approach not used to solve the financial sector's current problems?

 1  |  2  |  3  |  4  |  5