Bailouts II
Most successful horror movies have multiple sequels; most government bailouts have sequels whether they are successful or not. Treasury's Troubled Asset Relief Program started out as a program to buy toxic mortgage assets, but after the program was enacted on October 3, Treasury Secretary Hank Paulson had second thoughts. Several influential Wall Street investors persuaded him and key members of Congress that it was much more efficient to inject capital directly into ailing financial institutions. That was true, but that hasn't worked too well either, at least not yet.
It turns out that some financial institutions didn't think of themselves as troubled. They didn't want to have their reputations diminished by accepting TARP capital injections. Treasury solved that by forcing them to accept so that no large bank could say it hadn't accepted some TARP money.
Worse still, even the most troubled institutions didn't use the TARP capital injections to make new loans. They hoarded that capital. Most still pay dividends, and a few are considering using their improved capital to takeover other banks -- not exactly what Congress intended.
If you happened to be watching the House debate on C-SPAN just before passage of the TARP legislation around noon on Friday, October 3, three colloquy's occured in rapid succession just before the Emergency Economic Stabilization Act of 2008 passed. A colloquy is a carefully crafted exchange between the manager of the bill and another member stating legislative intent. It's done in hope that a court will abide by it, even though the legislative language in the bill doesn't really say that. In this case EESA authorized the Treasury Secretary to invest TARP funds into commercial and residential mortgage-backed assets (pools of mortgages sold as mortage-backed securities, MBS) or any other financial assets he saw fit to invest in to ease the credit crisis. That language didn't say anything about direct purchases of mortgages, auto loans, or bank capital injections, but the colloquys took care of that.
Except today, Treasury Secretary Hank Paulson held a news conference to say he didn't think direct purchases of mortgages or MBS was the best use of TARP funds, nor were auto loans, although he did back the creation of another Federal Reserve liquidity facility to buy asset backed securities, i.e. auto loans, credit card loans, and student loans. House Financial Services Chair Barney Frank (D-MA) was not pleased and vowed to pass legislation next week in lame duck session to force the use of TARP for the purposes originally intended by Congress. Frank probably won't get President Bush to sign such a bill, but Congress will proceed anyway on the theory that President Obama will sign such legislation when the 111th Congress passes it quickly early next year.
Meanwhile the credit crisis is spilling over into credit cards. American Express became a bank yesterday. Why would they become a bank? So they could accept a TARP capital injection. Credit cards create long liabilities that are supported by short-term loans. If American Express can't rollover old loans into new loans, that is a big problem. Other credit card issuers, mostly banks, have the same problem, and will follow American Express's example.
The Big Three automakers are teetering on the brink of bankruptcy. GM hardly has enough cash to make it through Christmas. President-elect Obama and most in Congress want to offer an immediate $25 b. bridge loan. However, Secretary Paulson said today that he only wants to make such a loan if it will be made to firms where the long-run viability of the firm is not in question, i.e. not the Big Three because they may go bust or be radically restructured next year. That's not what Congress wants to hear either.
Congressman Spencer Bacchus (R-AL) asked the right question at today's House Financial Services hearing: "Where does this end? Will we bailout Circuit City or Starbucks?" TARP is mutating into a different animal than the one Congress created just five weeks ago. Stay tuned for BailoutsIII.
GM Should Not Be Bailed Out
You guys are such suckers. "GM hardly has enough cash to make it to Christmas." I suppose you are implying all the poor little children of Detroit will be given lumps of coal in their stockings unless the mean old Congress plays ball. But what you really mean is that if GM declares bankrutcy it will undo all its union contracts/pensions/sweetheart deals. And the main funding source for our politicians of the Democratic persuasion will be cut off.
The real story is that GM got the energy situation all wrong yet again, had the wrong product slate when America really needed them to have the right one, and deserves to go down. New entities will emerge and they'll need experienced production workers...
Hank read, "If you give a
Hank read, "If you give a mouse a cookie"
It's a children's book and it might help!
http://nomedals.blogspot.com
"New entities will emerge and
"New entities will emerge and they'll need experienced production workers..."
Where will those new entities come from during a credit crunch? Venture capital has dried up.
Any new entities that emerge will likely be in Asia. Maybe US production workers can move there.
BAILING OUT MICHIGAN
Michigan politicians are already asking for a bailout to accompany any bailout of the Big 3. Yesterday, the Detroit city council approved a resolution asking for a $10 billion federal bailout. The mayors of Sterling Heights and Warren MI.(Detroit suburbs) met recently to discuss their own plea for a federal bailout. Michigan governor and Obama advisor Granholm is asking for federal assistance for the entire state. Ohio is considering following Michigan's lead and asking for some bailout also.
Their argument is logical if the Big 3 bailout is also logical. Municipal and state govts. have suffered and are still suffering; jobs have been lost, property tax revenues are declining, plants are closing. They can't balance their budgets.
If we're willing to bailout the Big 3 then why not the folks suffering collateral damage? Like the Wall St. bailout, there is no clear argument supporting bailout for some and not others. And, if the logic is based on "suffering", there's no precise amount that will mend the damage. $50 billion, $75 billion, $100 billion - it's only money. What's a few billion more if we can eradicate all suffering?
Alternative strategies for Michigan and other embattled states
Secede from the union and annex the state to Canada. They have national healthcare which costs around half per capita of what healthcare costs in the US.
The healthcare benefit alone would take enormous stress off the automakers in Detroit.
Also, Canada's economic growth is much better than the US, and they haven't run up huge national deficits.
I heard that Alaska has an independent party which favors secession, so it's not a stretch to imagine the movement spreading south ;-)