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Bail Out Blues

by TheFalcon on September 26, 2008


[Reproduced here with permission]

From: T. Sims, California

To: The White House, Sen. D. Feinstein, Sen. B. Boxer, The L.A. Times & The Wall Street Journal

To Anyone Who Actually May Care:


I rarely take the time to communicate with my government.  Without blood running in the streets, or at least the real threat of civil unrest, history suggests it is not really interested in the welfare of its individual constituents.  But I take the time to comment on the proposed “bail out” perhaps just because this has all now reached a level of insanity.  


Many of us, who have followed the build up to the “crisis” over the last decade, would prefer not to see a bail out at all.  We are pragmatic, however.  The current and former bankers in the room have all, through their very public Chicken Little-esque declarations, almost assured a collapse if America does not write a blank check and surrender representation.  As a result, the bail out is now inevitable because the stampede is now more likely than before they all yelled fire in the crowded theatre.  


But in considering the deal, consider this: People like me, and your dear polls show that I am by no means alone, lack confidence in and frankly are disgusted with our representatives because time and again you sell us out when business comes crying for you to save them from the consequences of their mal-behavior.  


This crisis has been long in the making.  In significant part, the foundation is the free money offered by Mr. Greenspan beginning in the early part of the decade.  It is not difficult to graph the run up in home values and see the correlation to cheap, easy money.  Then, to add fuel to a fire that was burning quite nicely on its own, Mr. Greenspan in testimony to Congress repeatedly praised option-arms and similar products for allowing so many Americans to realize the dream of home ownership without ever cautioning that such products in the then abnormally low-rate environment was dangerous at best and potentially disastrous.  Combine all this with two of man’s greatest foibles–greed and envy–and you have the perfect storm for the excess that brought us here.   


Many certainly saw the storm approaching, even if they did not appreciate it would be a category 5 rather than a 3.  For instance, in 2005, the Bankruptcy law was amended to make it more difficult for us to discharge consumer credit-related debt.  The timing and effect of that amendment in relation to the current credit extension implosion and credit default explosion is no coincidence.  I think it not a stretch to presume lenders then anticipated at least one outgrowth of the decade’s excessive practices and sought legislation to gird themselves against it.  The lenders had taken the calculated risk to overextend credit in a known regulatory environment and were effectively bailed out of the economic consequences of that business decision via the amendment.  Yes, business made some concessions too.  But on the whole, we gave up far more.  Most importantly though, it is clear that when faced with a choice between business and us, you all once again chose business.   


The pace of the bailouts has now accelerated because the cards in the house are falling faster.  For example, by doing what the markets have assumed for decades anyway, we have now formalized the U.S. government’s insolvency by moving the Fannie and Freddie debt from “off” to “on” balance sheet.  We have tripled to quadrupled the lending to banks at the Fed’s credit window in the last couple of months.  We lent AIG 75 billion.  Now we are going to give away–not loan–700 billion dollars for stuff everyone in the world says no one in the world can value.  Has anyone looked up the definition of “stupid” lately?


Largely because of the war of course, we have no cash in the bank (no pun intended) to pay for any of this.  So these “loans” and giveaways can only be financed via debt issuance at ever increasing rates to increasingly skeptical foreign buyers.  And how pray tell will we pay off that debt?  Let’s say it together–TAXES.  On who?  Individuals not businesses.  The same individuals–home owners and consumer debt holders–upon whom you first drew blood in 2005.   


But I digress.  More to the point, while it is not being discussed now and was not much discussed when proposed, the banks themselves tried earlier this year to muster up an identical but significantly smaller bailout fund of their own.  Although the banks of course did not explain it precisely this way, the fund would have operated thusly:  The market believes the asset is crap.  The banks decide to get some money together to start buying small amounts of the crap, at some artificial price (because we all know crap is not worth crap), to convince suckers in the market that this crap is different than other crap.  So the first group of suckers (really straw men for the banks) start buying small amounts with the fund money.  The second group of suckers (the real suckers) see the first group buying some of the crap and says, “hey, that must not be ordinary crap” and starts to buy the crap too.  The real suckers of course buy a lot of the crap, largely from the banks’ original stores of excess crap.  Once all the crap is unloaded by the banks to the real suckers, the real suckers then go back to the banks to try to refinance and collateralize the crap, and the banks say, “Sorry, that crap isn’t worth crap.”  My apologies for the language, but it makes the point.  


I suppose the genius of the current bailout fund proposal is that the banks now don’t even have to use any of their own money to kick start this faux market and don’t need a straw man because this proposal effects a direct, complete liquidation to a single, real sucker.  Guess who? 


In conclusion, there is much blame to go around for the current crisis.  Lenders, Legislators, Credit Raters, Bankers, Appraisers, Brokers, Homeowners  . . .  and the list could go on.  Once again you all are faced with a choice of whose side you will be on.  The Bankers and Lenders have held a gun to your head and said “choose us.”  Do we need to light torches, take up arms, and march on our capitals to get you to finally choose us?  Sadly, I know the answer is likely yes.  But you know that we will never do that–unfortunately.  So you will choose them, feign public disgust at the other party for their capitulation to big business, and ride out our anger which eventually subsides. 


Thank you in advance for not listening and for not doing the right thing once again.


T. Sims