Poll: $700 Billion Financial Industry Bailout:

Please vote in this poll using the sidebar.

$700 Billion Financial Industry Bailout:

  • Investment in the future. (3%, 8 Votes)
  • Necessary risk. (13%, 40 Votes)
  • Reckless, counter-productive bailout. (85%, 263 Votes)

Total Voters: 311


This poll will be active and displayed on the sidebar through 09.28.2008.

0.00 avg. rating (0% score) - 0 votes

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

36 comments:

  1. 1
    Sniglet says:

    The Paulson plan to relieve hundreds of billions in seriously de-valued assets from the financial industry can’t possibly succeed. The more successful the government is in purchasing “toxic” assets, the more they will be squeezing private money out of the global economy and preventing the natural discovery of market prices and the re-allocation of resources to where they will be productive.

    Instead of stopping the collapse in house and debt instrument prices, this massive bail-out will instead speed up the deflationary process by hovering up whatever capital still remains. For every dollar the US government raises by auctioning off a treasury bond for the bail-out that is one less dollar available for raising capital and purchasing assets in the private market. Banks will find it even harder to raise additional capital (which would enable them to lend more freely) than it already was since the US government is sucking all the capital out of the system. Which pension fund, sovereign wealth fund, or central bank, will want to participate in a CitiGroup share issue in such an uncertain economic environment when they can buy safe t-bills?

    Of course, this assumes that this super-sized bail out will even succeed in acquiring the troubled assets it is designed to consume. It is far from clear that this bail-out entity will be willing to offer sufficiently high (above market) prices that the lenders need. There is no way financial institutions will sell their defunct assets at anything close to market prices since doing so will render them immediately bankrupt. It’s possible the government might be willing to pay the high prices these institutions demand, but that is far from clear right now, and we won’t know until the final details emerge.

    Worse, even assuming that the bail-out entity does buy derelict assets at inflated prices, the government will further be forced to hang onto foreclosed properties in its portfolio indefinitely, keeping masses of vacant properties looming over the market. Selling these millions of homes at the actual market clearing rates will further drive down prices even more, causing greater financial disruptions (requiring the bail-out entity buy even more over-priced assets), and cause political problems when it becomes apparent that tax-payers will be taking a bath on their investment after-all.

    And none of this is even mentioning the difficulties with other forms of toxic debt assets beyond the scope of real-estate. Will the US government also be purchasing GM and Chrysler bonds that have dropped in value?

    The more the government buys, the more prices will drop forcing the government to buy even more assets, which keeps the cycle going. At some point the whole bail-out concept will come to an ignominious end.

  2. 2
    Jonny says:

    I wanted a fourth choice:

    Corruption

  3. 3
    david losh says:

    Lots of talk here on the bubble.
    This three page legislation sounds a lot like we have to go to war in Iraq to fight terrorism. For some reason we have to do it.
    It’s laughable to think buying home mortgages is going to fix anything. The government is simply trying to connect with home owners, tax payers.
    Corporations have savings, Lenders have money to lend, the economy is basically sound. There is no reason that has been presented for giving tax dollars to make the stock market feel better.
    These multinational corporations have the means to do business, they simply want more money. They made profits they would prefer not to invest at this time.

  4. 4
    Sniglet says:

    This three page legislation sounds a lot like we have to go to war in Iraq to fight terrorism. For some reason we have to do it.

    This is a excellent observation. Congress was stampeded, in a bi-partisan fashion, into the war in Iraq without any serious thought as to the long-term implications. Even most of the anti-war congressman wound up voting for the war, for fear of looking weak in a time of crisis.

    We all know what happened next… The invasion was a success, but we discovered that much of the rationale for the war to be spurious (i.e. there were NO weapons of mass destruction), and the US became embroiled in a regional conflagration that was to last for many years to come. It is certainly NOT clear that things would have been worse had the war never occured to begin with.

    Here we are again, with congress being rushed to approve a sweeping war on the recession, with little understanding of the implications, and the drumb-beats of fear for the consequences of doing nothing.

  5. 5

    WHERE’S THE 2009 FEDERAL BUDGET FOR THE ADD ON $1 TRILLION ENTITY?

    It doesn’t exist, so I say this “pie in the sky” budget lie is just a phony prop to keep the stock market from collapsing some more in the short term.

    To add $1 trillion to the federal deficit, step one is getting someone to lend us tax payers the principle to pay interest taxes on it. The rest of the world is broke too and we aren’t buying so much of their stuff anymore.

    So who’s gonna lend us the money….the tooth fairy?

  6. 6
    Markor says:

    Apparently Democrats have read the political winds and will fight for changes to the bailout. But the fact that they’re even considering that, without ripping it up and re-writing it, is tantamount to treason. It certainly does not defend the Constitution to give one person great & virtually unchecked power.

  7. 7
    Buceri says:

    Excuse me; but I have a question:

    Bush gave me $600 back in ’01,and a yearly cut since then – that’s $50 a month; quite a bit less than the amount my monthly health insurance policy has gone up every year – but that’s a different topic.

    Back to my taxes and this bailout; is Bush asking for the money back??

  8. 8
    TJ_98370 says:

    Leading economist Kenneth Rogoff says bank rescue opens door for other US industries
    .
    One of the world’s leading economists predicted yesterday that Washington’s proposed $700 billion (£382 billion) bailout of the banks would “open a can of worms” as other distressed American industries sought a similar rescue deal.
    .
    Speaking to The Times, Kenneth Rogoff, former chief economist at the International Monetary Fund and now Professor of Economics at Harvard University, also said that the United States was “certainly looking at a deeper recession than we were three months ago because the financial system has continued to implode”.
    .
    He predicted: “We are now going to get other sectors asking to get bailed out, such as the automotive industry. The credit problems are radiating across the US economy, seeping into autos, student loans and commercial real estate. Who else is Washington going to prop up?….

    .

  9. 9
    Pondscum says:

    Line up Sheep! The shearing has begun!

  10. 10
    david losh says:

    “The credit problems are radiating across the US economy, seeping into autos, student loans and commercial real estate.”

    Credit is another word for the financial markets. All credit is the problem. Focusing on home loans is ridiculous. The changes Congress wants are frivolous.
    Our government is attempting to prop up the stock market again. The financial sector should be allowed to wither. It’s time for other countries to lend the money. We don’t have it.
    Yes the government is attempting to get the $1,000,000,000 into next years budget by stalling until after September 30th, the end of our government’s financial calender.
    The Dow should be allowed to fall below 9,000 as it should be.
    American business needs to clean up it’s own mess. If they lent money they need to collect it. That’s business.
    Getting the government to give you more money is welfare.

  11. 11
    angrybear says:

    10-year T Bill spreads have risen dramatically. That means the market thinks the US Government could default in the near future. Where’s the outrage people? Have you all contacted your representative? Nobody seems to care about this.

  12. 12
    Markor says:

    Paulson says there should be no limits on bank executives’ pay, because we don’t want to give them any reason to not participate in the bailout. Could it be any clearer that Republicans are thieves?

  13. 13
    jon says:

    I would agree that the bill released over the weekend was reckless and dangerous, but there is a new one here http://www.politico.com/static/PPM41_ayo08b28.html that is much, much better. It has oversight, accountability, and gives the taxpayer a stake in the company in the event of a loss on the sale of an acquired asset. That seems much better. I don’t like the Democrat-style hand-outs in the bill, but it is a big improvement.

  14. 14
    rent for now says:

    Wow – dollar getting killed
    long bond down
    equity markets down
    oil, gold up big
    nice reaction to the great plan fellas…..

  15. 15
    Eleua says:

    Ask yourself, “What was told to Pelosi that caused her to change her mind?”

    Answer that and you will soil yourself. It is worse than you think.

  16. 16
    patient says:

    If the democrats don’t want to loose the chance of getting votes from ~30% of the population that is not home owners they need to stop repeating the demand to “keep people in their homes”. I’m a democrat but if Pelosi, Obama and the rest of the pack ( don’t even mention senator Dodd… ) do not stop preaching plans to give people more home than they can afford on the expense of those who didn’t I will not vote in this election.

  17. 17
    EconE says:

    To me…this bailout is kind of like when GWB stood under that “Mission Accomplished” sign at the end (cough cough) of the Iraq war.

  18. 18
  19. 19
    Yesler Hill says:

    My vote in this poll, “reckless, etc”, is really a vote for another option; corruption, cronyism and kleptocracy.

  20. 20
    david losh says:

    “Oil prices spiked more than $25 a barrel Monday _ the biggest one-day price jump ever _ as anxiety over the government’s $700 billion bailout plan,”

    That will teach you, pay up, or else!

  21. 21
    patient says:

    “That will teach you, pay up, or else!”

    I think that’s what the investor’s are signalling by selling some stocks today. Oil I think is the opposite. If you consider pumping in a trillion dollars in the system we’ll give you a taste of what will happen to the dollar and the price of commodities like oil…

  22. 22
    Eleua says:

    @David Losh #19, Patient #20

    You are so correct. We are watching the slosh and injections by the FED. They are going to flush a few banks to get the attention of the sheep.

    Dictators.

  23. 23
    david losh says:

    This has happened repeatedly.
    Investors don’t swing the market.
    Your stock buying changes nothing.
    Huge multinational corporate, hedge funds, investment firms, holding companies, or as the list goes on, the same people who will benefit from a $700.000,000,000 bail out swing the market by where they invest.
    We have to stop the madness. They will only squander the money.

  24. 24
    victorchai says:

    Call me crazy…I am in line exchange half of my my $$$ into euro…

  25. 25
    Markor says:

    Where’s that line? I might join it. (Seriously.)

  26. 26
    Scotsman says:

    Now the democrats want an extra $50B added to the legislation for a second round of stimulus checks…… in exchange for their votes on the bailout bill. Seems they think there should be something for Main Street, not just Wall Street.

    What the H#ll, as long as the lid’s off the cookie jar, we should all take as much as we can…

  27. 27
  28. 28
    greenthum says:

    They’re all thieves, Democrats and Republicans alike! They were bought off years ago by the Wall Street criminals. Don’t expect any real solutions from these idiots. Both sides are guilty as hell and they all know it. That’s why you won’t be seeing any congressional hearings any time soon.

  29. 29
    Jay says:

    Sniglet,

    The problem with “leave it to the market” is that the credit market was on the verge of failure due to fear. Raise fund from private sector? How can anyone do that when NO ONE is willing to lend money? Citi share issue? Why? They either have no need for additional capital at this time and their stock price is sustained or they do need capital and you’ll see C in low single digits overnight, at which point share issue won’t save them.

    If an institution has sufficient capital, it won’t need to (and it would be foolish to, considering current environment) raise money, and those that do need to raise capital simply can’t. The market believers answer to that is “well, then let’em fall!”, which would be the right answer in normal times, but this is not at all normal situation. Let’s see, first AIG, WaMu, MS, Wachovia will fall, then GS and Citi probably will follow, and at that point even those that used to have enough capital will start to have problems. Why? Well, for one, the fear factor, and the real factor of relationships between financial institutions. Those who thought they were protected by CDS written with AIG as the counter party will now have to take a loss. Mass withdrawals from money market funds (which I believe was actually the main trigger for Paulson to take action) will lead to collapse of those funds which will make even more entities suddenly strapped for cash. Bank of America being driven to failure due to a classic bank run could have been the next headline, and if BAC falls, that means the collapse of U.S. financial system.

    Another reason THE bailout is necessary is because the attitude prevalent everywhere including this forum, that all mortgage related debt is effectively worthless. It’s not just bad. It’s toxic. Recently, Merill sold about half of their CDO’s at 22 cents on the dollar. People read that and think “OMG, these CDO’s ARE really worthless!”. Yes, the delinquencies have been rising and will continue to rise. And CDOs can be notoriously complex instruments. But let take a step back and think about that for a moment. The CDOs that Merill sold was super senior tranche, which means that the default rate on the ABS’s that the CDOs owned must be pretty darn high for them to be discounted to 22 cents on the dollar. In fact, assuming 85% super senior tranche, the default rate needs to be over 80% for the buyer to take a loss in that case. If the default rate stays around more realistic 30%, the buyer will easily earn more than 3.5 times the stated rate. Assume 5%, that means the buyer can make 17.5% annual return with 30% default rate. I think that’s quite attractive. Which brings the question, why aren’t there more buyers at those fire-sale prices? Because the market is not working. No one wants to buy CDOs. And those that do will only do with significant discount, a kind of discount that will make sure the buyers will not lose money even if mild depression comes about. The CDO holders however, still have to take losses based on those sales as asset valuation adjustments, which leads to the capital questions, collapsing stock price, etc. Back to the Merill example, presumably Merill kept the better CDOs and unloaded more undesirable ones. However, just two months later it still had to sell itself to BAC after witnessing Lehman’s death.

    The Treasury plan is not about buying individual mortgages, although it probably will be included. It’s more about buying all of these acronym-happy assets from financial institutions, so that the market fear subsides and the market for these securities can function again. Heck, the private money who have been waiting for an asset sale may start competing for these securities once government starts buying them, and it’s a distinct possibility that the U.S. government will use the cash flow from these assets to pay off reduce borrowing in the years ahead.

  30. 30
    LUC says:

    Jay,

    A 700bn bailout is a vote of no confidence in the market. This is unprecedented in the financial history of the US. Seeing it as a positive is beyond me.

  31. 31
    david losh says:

    Those CDOs were sold. That’s the problem. They were packaged and sold. A mortgage has value over time. The full value can be realized by restructuring the loan to get it paid off, full principle. The buyer bought the value for twenty two cents on the dollar. That means they can restructure that loan at twenty two per cent of value plus interest and make a profit.
    That’s the problem. These financial traders want more money, today.
    The fix is already done, it’s sitting there in the financial market place. It’s just easier to drive up the price of oil to make bigger profits, today.

  32. 32
    sunsplint says:

    I can’t believe that no one has pointed out the fact that Paulson used to be the CEO of GoldmanSachs. And now after this implosion, only two Inv banks are left. Morgan and “Goldman”. That’s ridiculous. Whatever happened to the concept of “conflict of interest”?

  33. 33

    …and Paulson is likely only going to be Treasury Secretary for another four months, so whatever havoc his proposal will wreak, he won’t be around to face the music…Yup, he’s a Wall Street guy, and he’s proposing to reward all his fellow Wall Street buddies for their screwups, and then slink off into the sunset.

  34. 34
    patient says:

    Unfortunately I think Ira and Sunsplint are correct. This is Paulson’s last chance to save his buddies in Goldman and the “other” Wall Street scrooges he is rubbing shoulders with and whose boards he wants to sit in after leaving the government. Bernanke as usual does about anything suggested to him and do not want to be known in hisotry as the FED chief on watch when the US went into depression no. 2. The whole thing was just to obvious during the ongoing hearings when Paulson was pushed on the issue why the congress can’t give them say $150b and then re-asses a couple of months ( after the election ) if it works and how much more is prudent. Paulson was spinning on his chair and started studdering without giving an answer that made sense since the answer is likely that by then Goldman is more than likely bankrupt or purchased by someone and that defeats what looks like his real agenda. Reversed Robin Hood tactics on an enormous scale.

  35. 35
    LUC says:

    Bernanke and Paulson are short on details of what will actually happen. Not a very convincing testimony so far.

  36. 36
    BelRenter says:

    Adding to what Jay is saying:

    The credit crisis is really a valuation crisis. No one knows what debt is worth any more. And because no one knows what it’s worth, no one is willing to buy it. Businesses are unable to sell debt to raise capital. This doesn’t apply just to “toxic securities” — look at what happened to the commercial paper (short term loans) market last week. Interest rates on many terms (ex: 7 day, 30 day) just about doubled and volume plummeted. These are not financial institutions trying to raise money. We will not escape a depression if businesses cannot sell debt because no one can agree on what it’s worth. What the government is proposing to do is to buy this debt today in the absence of any clear valuation, and sell it later when the market knows how to value it. I completely agree that this is a vote of no confidence in today’s market conditions.

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