September 2008 Archives

$700,000,000,000 Bailout Bill with Notes & Commentary

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A summary from the Economist:

Mr Paulson or his successor will get $250 billion immediately, $100 billion more at the president's discretion and $350 billion upon Congress's approval. Investors may fret that this muffles the Treasury's firepower. But if things get bad enough to require that extra $350 billion, Congress is almost certain to consent. The Troubled Asset Relief Programme, or TARP, can buy mortgage-backed securities, whole loans (those not bundled into pools) and, in consultation with the Federal Reserve chairman, anything else necessary to stabilise the financial system. That includes taking control of entire companies. Mr Paulson said on Sunday that he now has the power to avert "the potential systemic risk from the disorderly failure of a large financial institution," implying the ability to bail-out a company while punishing its owners, as was done with Bear Stearns, Fannie Mae, Freddie Mac and AIG. Given the frequency with which institutions are collapsing, he may invoke that power sooner rather than later.

The final bill is 110 pages long [200K PDF], compared with the three pages that Mr Paulson started with. Democrats extracted numerous concessions. The programme will be monitored by a five-member oversight board made up of the secretaries of the Treasury and of Housing and Urban Development, the chairmen of the Fed and Securities and Exchange Commission, and the director of the Federal Home Finance Agency. The Treasury will try to modify the mortgages it owns to prevent foreclosures. Firms that sell assets to the programme will have to give the government warrants convertible into non-voting stock. They will also lose tax deductibility on some executive compensation and get limits on pay that encourages "excessive risks" and on fat severance cheques ("golden parachutes").

Links:
  • Larry Summers:
    Congressional negotiators have now completed action on a $700bn authorisation for the bail-out of the financial sector. This step was as necessary as the need for it was regrettable. There are hugely important tactical issues regarding the deployment of these funds that the authorities will need to consider in the weeks and months ahead if the chance of containing the damage is to be maximised. I expect to return to these issues once the legislation is passed.
    In the meantime, it is necessary to consider the impact of the bail-out and the conditions necessitating it on federal budget policy. The idea seems to have taken hold in recent days that because of the unfortunate need to bail out the financial sector, the nation will have to scale back its aspirations in other areas such as healthcare, energy, education and tax relief. This is more wrong than right. We have here the unusual case where economic analysis actually suggests that dismal conclusions are unwarranted and the events of the last weeks suggest that for the near term, government should do more, not less.
  • Congressional Letter to Paulson & Bernanke
  • Tom Wolfe's latest
  • A Financial Times interview with James Grant, Part II, Part III
  • Fareed Zakaria's interview with China's Prime Minister Wen Jiabao:
    ZAKARIA: There is another sense in which we are interdependent. China is the largest holder of U.S. Treasury bills. By some accounts, you hold almost $1 trillion of it. It makes Americans - some Americans - uneasy. Can you reassure them that China would never use this status as a weapon in some form?

    WEN (voice of interpreter): As I said, we believe that the U.S. real economy is still solidly based, particularly in the high-tech industries and the basic industries.

    Now, something has gone wrong in the virtual economy. But if this problem is properly addressed, then it is still possible to stabilize the economy in this country....

    Of course, we are concerned about the safety and security of Chinese money here. But we believe that the United States is a credible country, and particularly at such difficult times, China has reached out to the United States.

  • Wolfgang Munchau:
    Last week's dramatic events hold two transatlantic lessons in opposite directions, one from Europe to the US and one the other way. The first comes from Sweden, which suffered its own financial crisis during the early 1990s. The Swedish lesson is that bank bail-outs should be handled conservatively and should come in the form of direct capital injections.
    As in the US, the Swedish financial crisis was also preceded by a property bubble, which was pricked by a rise in real interest rates. Severe stress in the financial system and the economy were to follow. In each of the three years 1991, 1992 and 1993 Swedish gross domestic product fell in real terms, at an accumulated rate of about 5 per cent.
  • The National Budget, Debt & Deficits, including debt as a percentage of GDP
  • Steve Davidoff:
    So, troubled assets are essentially any financial securities the Treasury secretary deems appropriate. Mr. Paulson originally asked only for authority to purchase mortgage-related assets. So, the House has actually expanded Paulson's authority from what he originally requested, providing him the authority to extend this program for the entire financial system. Here, the extension is implemented by another provision, which defines the institutions who can take advantage of this program. The institutions that can so participate are defined as:

    any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State [...]

Ira Glass: The Giant Pool of Money is well worth reading or listening to.
A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.

A shorter companion version of this story appeared on NPR's All Things Considered.

Host Ira Glass talks with an NPR business and economics correspondent about two gatherings he attended--one at the Ritz Carlton and one at a community college in Brooklyn. The first was an awards dinner for finance professionals who created the mortgage-based financial instruments that nearly brought down the global economic system. The other was a non-profit conference for people facing foreclosure. Ira explains that today's show lays out how the finance guys and the people facing foreclosure are connected by a chain of middlemen, and that together, they all brought about the current housing and credit crisis. (4 minutes)

Transcript

UPDATE: Senate Version: 451 (!) page pdf.

Southwest's Blog-O-Spondent

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Terry Maxon:

I submitted myself to presumed torture -- I watched a homemade video from a student who wanted to be picked as Southwest Airlines' blog-o-spondent.

To my surprise, it was good -- and funny. I recommend it. Here's the winning entry from Kaci Beeler, from the Austin area, according to Southwest Airlines.

Much more at Southwest Airlines' Blog.

Brokers may choose a similar strategy:

  • Hire a local "blog-o-spondent" equipped with a video camera, laptop, cell modem and your blog.
  • Populate a local Atlas, including events, community features, healthcare, sports, education, gardening, food and historic events.
  • Create neighborhood/community areas on your website, populated with this content along with listings, open houses, maps, market data and weblead opportunities.
  • Offer to link with local sites and organizations.
This minimal expenditure will more than pay for itself over the next five years AND, allow your organization to reduce expensive newspaper and homes magazine expenditures.

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