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On The Precipice

by TheFalcon on September 19, 2008

Is the American Public asleep? Apparently so.

Bloomberg reports today that The U.S. government has “moved to cleanse banks of troubled assets and halt an exodus of investors from money markets in the biggest expansion of federal power over the financial system since the Great Depression”.

See the full article: Paulson, Bernanke Expand U.S. Power to Rescue (Bloomberg Sep 19, 2008)

Let’s do a general tally of the cost to the U.S. tax payer:

– $450 Billion spent so far to buy illiquid assets, companies and the like

– $50 Billion proposed from the Exchange Stabilization Fund to insure money-market mutual fund holdings…as investors pulled a record $89.2 billion from money-market funds Sept. 17

– $??? Billion proposed in expanded lending to commercial banks” (the article doesn’t indicate how much for this)

– $85 Billion to Acquire AIG

– $200 Billion for emergency infusion into Fannie & Freddie (presumably to address bonds coming due at the end of September)

– $29 Billion to help JP Morgan purchase Bear Stearns

– $180 Billion pledged yesterday, in concert with other central banks agreed to pump this amoung into global money markets just to maintain stability while they develop plans to purchase real estate related “devalued debt”

– $800 Billion fund proposed today to purchase all manner of illiquid investments held by apparently any big company (banks, brokerages, insurance company, etc.)

– $400 Billion fund to backstop the FDIC

– The total is roughly $2.2 Trillion



The article states that The effort is a recognition that Paulson and Bernanke’s earlier efforts failed to revive financial and housing markets.” Given that their new plan, come up with overnight, is to pump in excess of an additional $1.2 Trillion into purchasing worthless debt paper, it suggests that they really didn’t have a plan at all when they put up funds to buy or bail out Bear Stearns, Fannie, Freddie and AIG.  Apparently they were just flying by the seat of their pants with those actions.

According to House Financial Services Committee Chairman Barney Frank, “Paulson and Bernanke told lawmakers late yesterday that the consequence of inaction would be disaster.” Disaster for who?  Their insinuation is that it would be a disaster, their carnal knowledge is that it is a disaster for them.

Now, they have decided that since the American public has not spoken up on the matter, neither have most of their representatives in Congress, that the solution is simply to put the entire mess on the taxpayers shoulders.  So now the entire $2.2 Trillion+ outlined above and the $5 Trillion in loan guarantees held by Fannie and Freddie are the responsibility of tax paying U.S. citizens.

In the meantime, all the companies that made the bad decisions to get themselves into this mess will be rewarded for their incompetence and presumption by having all their bad investments, purchased by the Federal Government.  No market investors are willing to buy this stuff but our Government, applying no due diligence or common sense, is willing to actually purchase valueless debt paper on our behalf.  Let’s be clear, if this stuff had any value at all, the Federal Government would not have to purchase it, as there would be willing buyers in the marketplace.  There are no willing buyers (emphasis on willing).  However, they apparently can force (through their friends at the Treasury, Federal Reserve and in Congress) the American public to buy it from them.

Industry reprasentatives had this to say about their Level 3 Assets (the most at risk assets on their balance sheet in excess of an aggregate $500 Billion), “…their values can only be determined through internal models because of illiquid markets.” Illiquid is cover for, “there are no buyers.”

On July 28th, Merrill Lynch sold $30.6 Billion of CDO’s to a fund for $6.7 Billion, or about 22 cents on the dollar.  That begins to give you an idea of what this stuff is worth.

Does anyone know what Moral Hazard means?  What’s to stop these companies from continuing with these same practices?  Of course there is talk of increased regulation.  Where were the regulators while this debacle was unfoling over the last 6 to 13 years (depending on how you measure it).

Alan Blinder, a Princeton economics professor and former senior Fed official calls the bailout plans, “a cure” and further says that it “provides clarity to the market”. It’s not clear, to me at least, what this cures.  But it certainly brings clarity in terms of who gets off the hook and who is being put on the hook.

Anyone really think either of our Presidential candidates will be lowering taxes in the near future?  If you answered yes, study what’s being proposed carefully and then come back and take the quiz again.

– The Falcon


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